The Orange County office market continues to ride the tide of these uncertain times with optimism that a recovery is near. Although many businesses move forward with plans for the future feeling the worst is behind them, some still are struggling to stay afloat. Improvements in local markets, such as OC, will help rebuild the national economy.
Office vacancy levels continue to inch upward but at a slow pace. At the end of the first quarter, some 18.4 million square feet, or 18.4% of office space, was vacant, up from 18% in the fourth quarter. This recent rise in vacancy denotes a 2% increase from the fourth quarter.
The market’s overall availability rate, which includes occupied sublease space, also increased this quarter to 25.1%. The amount of sublease space did decline from the fourth quarter, going from 3.7 million square feet to just less than 3 million square feet. Nearly half of the sublease space on the market currently is vacant.
Four out of the five submarkets also saw increases in vacancy, resulting from the negative absorption recorded in these submarkets for the quarter. North County’s vacancy level increased to 15.7% from 14.9%, while Central County increased to 19.3% from 18%, and South County now stands at 18.4% from 17.9%. West County recorded a nominal rise to 10% from 9.9%, whereas the airport area posted an unchanged rate of 19.5%.
The rise in vacancy was a result of the negative 414,144 square feet of absorption. Although still in the red, the amount of negative absorption recorded in the first quarter is less than that seen in each four quarters of last year. In 2009, the office market recorded 2.3 million square feet of negative absorption, which is an average of 586,000 square feet per quarter.
Most of the negative absorption took place in Central County, which recorded 218,836 square feet. The majority of this can be attributed to residual subprime mortgage space, where the former Ameriquest Mortgage Co. master lease is now expired at 1100 Town & Country in Orange.
South County saw 114,039 square feet of negative absorption, while North County posted a little more than half that amount with 69,688 square feet of negative absorption. West County saw minimal negative absorption with 5,384 square feet. The airport area also recorded a small amount of negative absorption with 6,197 square feet despite the loss of Taco Bell Corp., which vacated 17901 Von Karman Ave. and now has its headquarters in the Irvine Spectrum.
Demand remains slow in comparison to pre-recession years, but it is showing signs of improvement. Office employment, which is the primary determinant to demand, is projected to grow with the addition of 24,700 jobs by the end of 2011.
The overall average monthly asking rental rate for all OC office properties declined an additional 5 cents in the first quarter to $2.14 per square foot. With the exception of Central County, which remains unchanged at $1.97 per square foot, all submarkets saw decreases in their average monthly asking rents.
The most dramatic decline was seen in the airport area, which is down 7 cents to $2.24 per square foot. South County followed closely behind with the loss of 6 cents of its rental rate to $2.13 per square foot.
North County decreased to $1.99 and West County decreased to $1.94.
The construction of new buildings continues to be almost nonexistent. The state of the economy has led developers to put projects on an indefinite hold. Following the completion of one building in the fourth quarter—which totaled 82,000 square feet—no new office projects have started construction this year. The 2010 construction pipeline does include one building, which is a 194,000-square-foot build-to-suit for Extron Electronics and is expected to begin construction next quarter.
Analysis provided by CB Richard Ellis Group Inc.
