Orange County’s office market probably hasn’t hit rock bottom yet, but industry officials think that day could be getting closer.
The county’s office market, which totals about 100 million square feet of space, ended the third quarter in much the same way nearly every quarter here has ended in the past two years—with declining rents and rising levels of empty space.
Vacancy rates here are now close to 17%, up a little less than 1% in the past three months, based on a polling of local brokerage data.
Similarly, monthly lease rates fell another 8 cents in the past quarter, or about 3.5%, according to brokers. Landlord’s asking rents are down about 17% from a year ago.
Deals being made now are at terms close to what was seen five or more years ago, according to brokers.
The good news for landlords is that the downward slide is getting less steep, particularly in terms of vacancy rates, said Kurt Strasmann, managing director for Voit Real Estate Services’ Anaheim Metro office.
“We don’t see it getting much worse in 2010. It should be a stabilization year,” Strasmann said.
But there’s still some more opportunity for cost-conscious tenants to save on lease deals. Voit’s projecting rents here to fall another 10% to 15% by early next year.
Even though some economists predict that the recession may have technically ended, the office market here won’t see any effects from that in the near term.
The commercial real estate market’s a lagging indicator for the economy, typically running about nine months behind the economy as a whole, notes Jeff Osborn, managing director for the Anaheim office of CB Richard Ellis Group Inc. and head of the company’s office division in Southern California.
“There are signs of overall economic improvement, but we don’t see that the fundamentals of real estate are improving yet,” said Jeff Moore, senior managing director of OC operations for CB Richard Ellis.
CB Richard Ellis’ brokers are seeing an increase in activity, although that hasn’t necessarily translated into more deals, Moore said.
“It’s not doom and gloom for brokers. They’re cautiously optimistic,” Moore said. “They feel there’s a better day coming.”
Big Deals
There’ve been a handful of big local deals lately—both on the leasing and sales sides of business—that supplies some of that optimism.
Verizon Wireless, part of New York-based Verizon Communications Inc., signed the largest lease of the third quarter, renewing the lease for its Irvine Spectrum operations, which totals about 470,000 square feet of space.
Among relocations, Lake Forest’s Western Digital Corp. just signed a 365,000-square-foot lease to move headquarters to Irvine’s Park Place campus.
Neither of those deals are expansions, which is one reason OC’s vacancy rate continues to tick up to the 17% range.
In mid-2007, near the peak of the office market, vacancy rates were closer to 8%.
During OC’s last downturn, office vacancies here peaked at 17.3% in the first quarter of 2002, according to Jerry Holdner, Voit’s vice president of market research.
Voit’s expecting that level of empty space to be topped this time around. The brokerage projects vacancy rates will reach the 18% mark by early next year for buildings 25,000 square feet and larger.
The county’s availability rate—space available for lease that may not yet be vacant or is under contract—appears to be growing at a slightly faster rate than the core vacancy figure. That figure increased nearly two percentage points last quarter to about 23%.
Voit officials are predicting availability rates will max out at about 25% for the county next year and will be followed by a period of stabilization.
Key segments of the local market are performing worse than the county as a whole, based on the latest quarterly data.
For the nearly 27 million square feet of high-rises in OC, the availability rate is currently at 28%.
Likewise, the 46 million square feet of higher-end office space that brokers here classify as class A space also counts an availability rate of 28%, according to CB Richard Ellis data.
On average, it is taking about 19 months to lease empty class A space in OC, compared to the 17.4 months it takes to lease all space in the county, according to Voit’s figures.
The area around John Wayne Airport counts one of the highest availability rates in the county, at 30.8%. The Irvine Spectrum isn’t much better, at 27.5%.
The high-end offices of Newport Center remain the most in-demand region, with availability rates of 16.7%. Still, that’s up more than 2 percentage points from last quarter.
Newport Center’s asking rents fell 14 cents last quarter, to $3.63 per square foot, according to CB Richard Ellis data.
Countywide, lease rates fell another 8 cents in the past quarter to $2.25 per square foot, according to CB Richard Ellis.
For office sales that are managing to get done, the average deal price now is running near $180 per square foot, down nearly $100 per square foot from the peak of the market.
Distressed Assets
More distressed building sales are likely to knock that figure down even further.
“There will still be some more pain with (distressed assets) trading,” Moore said.
Big properties currently on the block include the 2050 Main Street tower that was built by now-bankrupt Opus West Corp. of Phoenix, as well as the former Washington Mutual Inc. campus that’s just a few blocks away.
The 566,000-square-foot former WaMu campus, now called Quintana, currently is in default.
A recent lawsuit filed in Los Angeles Superior Court by Wells Fargo & Co., the property’s trustee on behalf of the mortgage holders, alleges that monthly debt service hadn’t been paid on the $106 million loan.
Los Angeles-based landlord Maguire Properties Inc. co-owns the property with Australia’s Macquarie Group Ltd.
