The Orange County economy continues to struggle with the impact of a nationwide downturn. Through the third quarter, the county had shed thousands of jobs and repeatedly posted negative absorption of office space.
The office market has seemed to be one of the hardest hit markets by the general economic malaise.
But it could see some good news soon.
According to University of California, Los Angeles, economists, California’s worst recession in seven decades likely ended this past quarter.
The economists go on to say, “The roots of the recession originated in consumer over-indebtedness and that consumer spending, necessary for a robust recovery, will be tempered both by the unwillingness of financial institutions to lend and by consumers’ unwillingness to borrow.”
While the forecast does not include a panacea for the current plight of the office market, with the recession likely over, future job growth is within sight. This is welcome news within the real estate community.
Unemployment levels within OC have risen to 9.6%. This percentage is still below the statewide unemployment level of 12.2% and the national level of 9.7%. Although the county has seen a 5.4% decline of jobs in the past 12 months, Torto Wheaton Research—a division of CB Richard Ellis Group Inc.—forecasts job growth to be 0.4% during the next two years.
That small growth should help reverse the trend of increasing vacancy.
The county’s vacancy level grew this past quarter to 17.2%. This represents a 3% increase from the second quarter’s 16.7% total vacancy rate.
In comparison, the market’s overall availability of office space increased to 23.6% from 23% in the second quarter. The increase of vacancy can be directly linked to the county’s negative 523,771 square feet of absorption. This brings the absorption figure to nearly negative 1.6 million square feet for the first three quarters.
Negative Absorption
In the third quarter, the office market saw a total 523,771 square feet of negative absorption. This was a combination of both the greater airport area and South County’s total 598,854 square feet of negative absorption, offset by North County, West County and Central County’s total 75,083 square feet of absorption.
The bulk of the greater airport area’s negative absorption can be attributed to the closing of Downey Savings & Loan’s headquarters, which now has some 250,000 square feet of empty space in Newport Beach. South County’s third quarter negative absorption was an accumulation of several vacancies left behind by various financial businesses.
North County accounted for the majority of the positive absorption, recording 44,118 square feet. This can be attributed to significant deals, including the State of California’s lease of nearly 25,000 square feet in Anaheim Hills, as well as Genera Corp.’s purchase of 35,000 square feet in Brea.
Because of the negative absorption, average asking rental rates have dropped dramatically. In the first quarter of the year, average asking lease rates were $2.42 per square foot, while lease rates stood at $2.25 per square foot at the end of the third quarter.
Overall, the average asking monthly rental rate for OC fell 8 cents to close the third quarter at $2.25 per square foot. All five submarkets saw decreases or no changes in rental rates. North County’s asking lease rate fell from $2.11 to $2.08 per square foot in the third quarter. West County followed suit, seeing a decrease from $2.11 to $2.03.
The greater airport area and South County’s rates collectively declined the furthest countywide. The airport area’s rental rates dropped a total of 9 cents to $2.39 per square foot, while South County saw the largest decline—12 cents from $2.37 to $2.25 per square foot. Central County was the only submarket to not have a cut in rates, remaining unchanged at $1.98 per square foot.
Construction of office space countywide is at a virtual stand still. Presently, there is only one building under construction. This class A office space totals slightly more than 82,000 square feet and is scheduled to be completed in the fourth quarter. Due to the current economic situation, construction agendas have been changed accordingly.
Data and analysis by CB Richard Ellis.
