High-Rise Office Vacancy May Be At Bottom

Orange County Business Journal, May 5-May 11, 2008 by Chandler, Dean

The overall vacancy level for Orange County's high-rise space ended the first quarter at 18.3%, which increased by just less than 1% from the fourth quarter's 17.4%. Some 4.9 million square feet of the county's 26.6 million square feet of high-rise space is empty.

The vacancy rate for high-rise space in the greater airport area (Orange County's largest submarket) was also slightly higher at 19.2% from fourth quarter's 18.2%.

But the high-rise office market could have hit bottom.

With the bulk of the high-rise construction opening in 2007 and the shedding of excess space from the mortgage and home building industries, the vacancy rate may be approaching its maximum level for this current cycle.

The average asking monthly lease rate for highrise office space in OC is $3.09 per square foot compared with $3.17 during the fourth quarter, and $3.06 from one year earlier. The greater airport area's average lease rate declined slightly from the fourth quarter to $3.27 and from $3.29 per square foot one year ago.

Among the submarkets, the greater airport area (which includes Newport Center) claims the highest lease rate in OC. These are asking rates, which do not reflect rental increases, concessions and other business points, which may not be the final terms in a lease transaction.

During 2007, OC high-rise inventory registered 877,582 square feet of negative absorption. Year-to-date 2008 absorption is a negative 229,831 square feet for the county with the airport area posting a negative 169,713 square feet; Central Orange County posted a negative 99,433 square feet and South Orange County contributed a positive 47,131 square feet.

Overall office employment is predicted to increase for OC in spite of the financial services job loss that has occurred in the first quarter. Torto Wheaton Research, a research firm owned by CB Richard ElHs Group Inc., forecasts an increase of 4,100 jobs in the office services sector for 2008 and about 12,600 jobs in the next two years.

This job growth serves as a positive indicator for the office market in that it could lead to expansion and absorption.

So far tenant activity has come from a wide range of industries including service providers and the technology sector. The county's strong core fundamentals, relatively low unemployment rate, highly educated work force, diversified economy and international trade linkages will prove beneficial as the real estate market works through its challenges.

Chandler is a senior vice president in the Newport Beach office of CB Richard Ellis.