Q1 Office Market Garners Mixed Reviews

ORANGE COUNTY-The county’s ofice market showed some signs of stabilization during the first quarter, but it still posted significant negative net absorption and overall remains weak. Those are some of the conclusions in reports on first-quarter activity in the county from Voit Commercial Real Estate Services, Delta Associates and Colliers International.

“We are beginning to see signs of overall stabilization and improvement,” in the county’s office market, says Jerry Holdner, vice president of market research for Voit. Holdner tells GlobeSt.com that the most promising trend is that the overall total of direct and sublease space available in the county remained at 23.75% in the first quarter, the same as in the fourth quarter.

Much of that 23.75% is the same space this quarter as last―it was sublease space and has now gone back to landlords as direct space. Holdner says that he’s hopeful that the flattening in the amount of available space on the market is a sign that the market has bottomed out, although that remains to be seen.

Holdner also points to an increase of 200,000 square feet in the total of office building sales for the first quarter when compared with the first quarter of 2009. The figure is not earth-shattering, he says, but it means that 2010 is off to a better start than last year.

Despite the stabilizing signs, the county’s office market still posted negative net absorption of 414,162 square feet in the first quarter, according to the Voit report, which tracks about 108 million square feet. Delta Associates, which produces its report in association with Transwestern and tracks nearly 120 million square feet, pegs the negative net absorption at 936,000 in the first quarter. Colliers reports more than one million square feet of negative net absorption in the quarter but still pegs the overall availability at a figure close to Voit’s, 23.2%.

Colliers sees a positive note in that leasing activity “slightly increased from the previous quarter,” but the company’s report views the Orange County office market as “quite far off from a recovery.” It says that tenants “continue to consolidate their operations while the creation of new companies is nearly non-existent,” meaning that office users continue to give back space to landlords.

One point on which the market-watchers are unanimous is that job growth is essential for the market to recover. “It’s all about jobs,” says Holder. He says the consensus among economists seems to be that the county will post job growth by the end of this year, a view that contrasts with the thinking a year ago, when “At that time, most people didn’t have any sense of when job growth would occur,” he says.

Office rental rates, which reached record highs in Orange County before the recession pushed them downward, continued to slide in the first quarter. The average asking full service gross lease rate per month per foot in Orange County was $2.12 in the first quarter, a 10.55% decrease over last year’s rate of $2.37 and five cents lower than last quarter’s rate, according to the Voit report. It notes that the record high rate of $2.77 was established in the fourth quarter of 2008 and that class A rates for the county are averaging $2.29 FSG, with the highest rents in the Airport market, where they are averaging $2.41 FSG.

New construction has tapered to the point that it is much less of a factor in adding new space, according to the Voit report, which shows first quarter total space under construction at 305.500 square feet, most of which was medical office space. “The slowdown in construction has and will ease the upward pressure on vacancy and the downward pressure on lease rates,” Holdner’s report says.

Although the office investment sales activity slowed from the flurry of last year, Colliers points out that “Class A high rise office buildings located in Orange County continue to attract interest frompotential buyers,” citing the sale of Griffin Towers in Santa Ana. In that deal, Los Angeles-based Maguire properties sold the office towers to a venture of Angelo, Gordon & Co. and Lincoln Property Co. for $90 million, less than half the $200 million for which Maguire refinanced the towers in 2008.