As a whole, leasing and sales activity increased in Orange County in the first quarter with absorption for the first time in nearly two years.
The South County market deviated from a positive trend by posting negative absorption of about 188,000 square feet. Still, there are signs of positive momentum as many South County companies are taking advantage of lower occupancy costs by relocating to higher-quality buildings or by purchasing property.
In addition, tenants are sensing value in current pricing and are feeling more confident in the future to commit to longer lease terms.
The steady decline in lease rates and values during the past two years has reached a level where owners and tenants are on the same page, resulting in more deals. In many cases, rates and sales prices have retreated to 2000-04 levels, creating the perception of value. In fact, the majority of recent activity resulted from owners and tenants seeking value in distressed pricing or bank-owned sales, with continued access to Small Business Administration financing.
Even with this growing momentum, vacancy levels in South County rose in all sectors, with office properties still struggling to absorb more than 4 million square feet of empty space.
Manufacturing and warehouse space continues to be the stalwart of the market with a vacancy rate of 4.6%. Little activity for industrial buildings with more than 30,000 square feet of space suggests that landlords could still drop lease rates in the future. Overall high vacancy levels, coupled with soft demand, could indicate the South County commercial market has still not reached the highly anticipated bottom.
Office lease rates fell another 6 cents in the first quarter to an average of $2.13 per square foot in South County. Retail, although down 10 cents from a year earlier, rose one penny to $2.92 per square foot from the fourth quarter.
Manufacturing and warehouse dipped slightly to 67 cents triple-net on average, while research and development lease rates fell 2 cents to 95 cents per square foot from the fourth quarter.
Hopefully these recent signs of activity forecast an overall recovery although it is likely too early to tell.
Morrow is an associate in the Newport Beach office of CB Richard Ellis Group Inc.
The Real Estate Watch Chart
Net Absorption, Rates, etc. is provided in a Adobe Reader .pdf print-friendly file.
