SPACE DATA
Overall Office Availability Continues to Decline
A noteworthy increase in office leasing activity took place in Orange County during the fourth quarter.
This activity was accompanied by a drop in availability. But the increased demand was not strong enough to trigger a rise in rental rates.
The worst may be over for Orange County office property owners, but the tenant remains firmly in the driver’s seat.
Leasing activity during the second half of 2003 showed a 14.6% increase versus the first half of the year.
Demand for class A office space heavily outweighed that for other space during the past six months.
There were a half-dozen leasing deals that involved more than 50,000 square feet during the fourth quarter. Activity was led by Lennar Corp., which took 135,000 square feet; E*Trade Financial Corp., which signed for 115,000 square feet; and Cendant Corp., which took 90,000 square feet.
Significant fourth quarter leasing activity contributed to a 29% reduction in large blocks of available space.
This is meaningful because removal of this space from available inventory may, in fact, result in less favorable terms and conditions for larger transactions this year.
Mortgage companies represented a considerable part of leasing activity in 2003. One unsettling occurrence during the fourth quarter was the first large, notable failure of a mortgage tenant. In December, Irvine-based Instafi.com abruptly shut down and defaulted on more than 45,000 square feet with Equity Office Properties Trust.
The overall availability rate in the fourth quarter was 19.5%, down from last quarter’s rate of 20.3%.
Overall rents dropped 2% from $19.59 in the third quarter to $19.19. The class A availability rate saw a third consecutive quarterly decline to 17.5%.
The highest overall availability rates were posted in South County at 23.8% and the John Wayne Airport area at 20.6%.
These two submarkets also were alone in reporting lower overall rental rates than the previous quarter.
The John Wayne Airport area posted a 3.7% drop in rates to $20.28, with South County’s rental rate declining 1.3% to $17.73.
Orange County’s class A availability rate has dropped rapidly in the past 18 months,falling by 30% to close 2003 at 17.5%.
With the exception of West County, class A availability rates in all submarkets were lower than for other classes of space. In West County, however, other classes of space saw an availability rate of only 8.7%, while the rate for class A space was 23.3%.
Though availabilities are declining, rents continue to weaken. Clearly, tenants still have the upper hand.
The market will have to wait and see what form the economic recovery takes and what its effects will be on commercial real estate in 2004.
Data and analysis provided by Studley.
Vacancy Declines, Absorption Rises, Lease Rates Lift
The retail market has remained resilient, despite the fallout from the 2001 recession.
While other property types have struggled to generate positive activity during the past two years, the retail market has maintained positive absorption and vacancy has continued to tighten.
Vacancy
Demand for retail shop space and lack of new construction pushed the vacancy rate in Orange County down in the fourth quarter to 5.1%, versus 5.8% in the previous quarter.
Vacancy rates tightened in 2003 in all retail categories, with the exception of the specialty center sector, which ended the year 14.5% unoccupied.
Entertainment-themed malls and those focusing on higher-end retailers continued to be affected by economic concerns lingering from the 2001 recession.
Net Absorption
The Orange County retail market maintained positive net absorption through all four quarters last year.
About 245,000 square feet was absorbed in the fourth quarter alone, bringing the total for the year to 775,456 square feet.
Most of the positive activity was seen in shop space among community and neighborhood centers, which typically house tenants offering durable goods and discount retailers.
Net absorption for community centers totaled 506,086 square feet. Neighborhood centers accounted for another 175,012 square feet of positive activity in 2003.
Lease Rates
Tighter supply combined with a lack of new construction has put upward pressure on asking rents in Orange County.
The average asking lease rate for retail shop space rose another three cents in the fourth quarter, ending the year at $1.91 per square foot, up 4% from the average at the end of the prior year.
Central Coast and South Orange County remain the most expensive market areas with averages above $2 per square foot.
Construction
One new center was completed in South County during the fourth quarter, adding 60,000 square feet to the retail base.
Courtyard at Talega, a strip center in San Clemente, will house smaller tenants including Starbucks, UPS and Tarbell Realtors. Just 5% of the shop space remained vacant at the end of the quarter.
With no new retail construction breaking ground during the fourth quarter, the only center remaining in the development phase is Quail Hill Village in Irvine, totaling about 150,000 square feet of gross leasable area.
The new neighborhood center is expected to open in the spring. It will be anchored by Albertsons and Sav-on.
Analysis provided by CB Richard Ellis’ Information Management Department.
