County's Office Rental Rate Sinks to 2006 Level

ORANGE COUNTY, CA-The average asking rate for office space in Orange County sank to $2.47 per square foot in the fourth quarter after peaking at $2.77 in 2007 as Orange County posted its second straight year of negative net absorption. The drop in the asking rate reflects a continuing downturn in the fortunes of the county’s office market, which began to weaken when subprime mortgage companies vacated huge blocks of space in early 2007. Like office markets throughout the country, it has since had to battle the US recession and the financial industry meltdown.

Year-end figures from Voit Commercial Brokerage show that the vacancy rate finished the year at 15.18%, an increase over last year’s fourth-quarter rate of 12.27%. Jerry Holdner, vice president of market research for Voit, notes that the 15.18% vacancy rate today is noticeably less than the 17.2% vacancy rate in the first quarter of 2002, which was the last time a large amount of new construction was added to the market.

The total amount of space available in the county’s roughly 108-million-square-foot office market, including direct and sublease space, is at 21.83% compared with last year’s 17.07%. Holdner tells GlobeSt.com that the increase in direct and available space is a result of the weakening market combined with new construction totaling more than seven million square feet that developers have added over the past three years.

When the market was strongest, in the years 2004 through 2006, it was absorbing about 3.3 million square feet per year. But the county posted negative net absorption of 785,000 square feet in 2007 and 1.6 million square feet in 2008, according to Voit’s figures. Developers have scaled back construction in light of the market downturn, with 247,965 square feet under way at the end of 2008, which is almost 82% lower than the amount that was under construction at the same time last year.

The total of all sales and leasing picked up to 2.5 million square feet from the third quarter’s 2.1 million square feet, but the fourth-quarter figure still fell below the average quarterly gross activity levels of 3.2 million in 2007 and of 2.8 million in 2006. The recent lack of activity can be tied to the credit crunch, “which means we could see an increase in activity in the second half of 2009 from pent up demand, once financial markets correct themselves and as consumer confidence increases,” Holdner says.

Holdner expects that lease rates will remain at current levels for the short run, with concessions increasing in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances. In addition to these concessions, some landlords are offering the furniture left behind by failed financial services companies that have vacated their spaces. In at least one case, a 90,000-square-foot lease by document imaging firm Kofax at 15211 Laguna Canyon Rd. in Discovery Business Center, as part of the deal the tenant will get free office furniture that once belonged to a financial services company.