The economic slowdown remains a factor in the Orange County office market. But the third quarter saw a continuation of slow and steady gains so far this year.
The improvements follow three years of increases in vacancy levels. Vacancy rates began to fall this year, and posted a decline to 17.5% in the third quarter from 18% in the prior quarter.
The third quarter saw 519,151 square feet of absorption, marking the second consecutive quarter of improvement. That brought the year-to-date total to 428,370 square feet.
Declining leasing rates are helping spur demand. The average asking rate reached a six-year low in the third quarter at $2 per square foot, down from $2.06 in the second quarter. It was the 11th-straight quarter of declines.
Construction remains dormant. But several buildings are in the pipeline as developers assess the stability of the market. Pacific Arts V, in Costa Mesa, is one such proposed project and would add 426,510 square feet to the existing Pacific Arts business park.
South County posted the strongest results in the office market, with 381,127 square feet of ab-sorption. West County recorded the lowest am-ount with a net reversal of 116,205 square feet.
A “flight to quality” appears to be a factor, with 353,466 square feet of absorption in class A space drawing tenants who are taking advantage of relatively affordable lease rates.
Average rates for class A and B space came down by six cents in the third quarter from the previous quarter, while class C buildings saw a seven-cent decrease.
The greater airport area submarket continued to post the highest average asking lease rate at $2.07. Central County had the lowest average at $1.86.
Retail
The vacancy rate for the county’s retail market rose to 9.1% in the third quarter from 8.7% in the second quarter and 7.8% a year earlier. Increased vacancy and lower tenant demand led to 129,548 square feet of negative absorption, bringing the year-to-date total to 259,618 square feet.
The average asking lease rate for retail space dropped by two cents in the third quarter to $2.51 per square foot. That’s 1% below the prior quarter and 2% down from a year earlier. There’s a broad range of rates within the average. Rates for the Central Coast range from $1.10 per square foot to $6 per square foot for specialty and strip centers.
Specialty centers continue to command the highest average asking lease rate at $3.61 per square foot despite a high vacancy rate. Average lease rates for specialty centers are down four cents from the previous quarter but still the highest of any category.
Construction of retail space remains on hold, with developers unlikely to begin on any new centers until vacancies and asking rates improve. No new retail centers have opened since the fourth quarter of 2008, and all development projects have been frozen indefinitely.
Industrial
The industrial market saw a slowdown during the third quarter after a solid first half of the year but showed some signs of improvement within the numbers.
The quarterly decline can be partially attributed to a normal slowdown during the summer months but also to continued softness in the local and national economies.
A decline in absorption of 387,241 square feet ended a two-quarter streak of improvements.
Gross activity in the third quarter fell to 2.6 million square feet, down 16% from the second quarter but well ahead of last year’s quarterly average of 2 million square feet.
The absorption rate also showed improvement from the third quarter a year earlier, offering a positive sign.
North Orange County accounted for 40% of the activity in the third quarter. The largest transaction for the period was a 215,000 square-foot lease in Cypress.
Manufacturing and warehouse space accounted for 12% of the negative absorption, while the research and development sector represented the vast majority with 342,488 square feet.
The vacancy rate rose slightly from the second quarter to 4.6% but improved from 5% a year earlier.
The average asking lease rate fell by one cent in the third quarter, to 57 cents per square foot. The declines slowed in the first half of the year, offering another sign of stabilization.
The average asking sale price also continued to drop in the third quarter as vacancies led sellers to remain competitive with their pricing. Sale prices were cut by more than $3 from the second quarter, averaging a price per square foot of $125.89.
Construction activity remained flat in the third quarter. North Orange County continued as the only submarket with projects under construction. There are 496,921 square feet in the works, spread over four projects in Anaheim.
North Orange County also is the only submarket to have an empty pipeline of future projects. West Orange
County, the airport area and South Orange County combined have 200,000 square feet planned for the next two years.
Analysis provided by CB Richard Ellis Research.
