Orange County: Office Market Stressed, Tenant Deals Improve

Office vacancies in Orange County hit 12.62% and the availability rate shot up to 18% at the end of the first quarter as the negative net absorption trend continued to beset landlords, some of whom are beginning to offer free rent for the first time in several years.

Class-A office property is hardest hit with a firstquarter vacancy rate of 16.2%, up from 14.1% at the end of 2007 and compared to a low of 6.4% at the end of 2005. The swing toward a more favorable market for tenants may be sustained for some time as there are two chief factors working against office owners and managers. First, there are no signs the economic slowdown will stabilize soon. Economist Anil Puri of Cal State Fullerton recently forecast that the Orange County economy has worsened and employers will shed 15,000 jobs in 2008.

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Start the commercial real estate research process early

It just goes to show you…start early! I’m working with a long term client again and I advised them we should start looking and researching months ago. They finally accepted my advice and we are looking at a few properties that could be a potential fit.

Had we started a few months ago, we would have had a few more good opportunities. Experience has taught me to begin the education phase early and when the right property comes available you now have the comfort level to make your decision.

While we are still a good 8 to 9 months out before we will be making the move, now is a good time to begin the negotations. It gives us leverage and options. We toured a potential loacation with a key decision maker and I encourgaged him to allow me to submit a non binding offer to lease. It will allow us to be first in line in an already tight market. We still have a lot to do with the other team members, but at least they have a starting point and a potential new location. Had we waited to make the offer, they risked another party gaining control of the site.

This is only the beginning, but starting early with benefit my client emensly.

Ken Riggs: Third Quarter 2007 edition of the ITQ

Fundamentals involving the economy, the pricing of commercial properties and the availability of capital should be view from a “different perspective,” one involving greater risk. This is one topic addressed by Kenneth Riggs, CCIM, in a podcast featuring findings of the Third Quarter 2007 issue of the RERC/CCIM Investment Trends Quarterly. Mr. Riggs also forecasts that solid supply and demand and earning characteristics should result in a stable industrial market, and he envisions no parallels between the slumping residential market and the commercial sector

2007 is pivotal year for office market

Despite a national trend in which office rents are surging in reaction to frenzied transactional activity of the last two years, Orange County – even though it’s seen its share of office properties change hands – is a bit of an anomaly.

Historically low Orange County vacancy rates have begun creeping upward, just as we forecasted this time last year, and asking rents are edging higher, too, owing largely to so many high-profile acquisitions by deep-pocketed buyers and new premium office product being added to the inventory. But broad rent increases in Orange County are advancing only slightly overall and at roughly half the rate seen in the nation’s top office markets.

Additionally, there are signs that some Orange County landlords are feeling the pressure to lure tenants with concessions that serve to mask much lower effective lease rates. For example, it is rumored that one major landlord is offering such a generous tenant improvement allowance on one Class A building that it translates into the equivalent of 18 months of free rent on a five-year lease.As for asking rates, at the end of the second quarter Orange County office rents averaged $2.63 per square foot, a 1.5% increase from the first quarter.  Nationally, asking rents jumped 3.1% in the second quarter in the 79 largest U.S. markets. That followed a 2.8% national first quarter gain.So it’s clear that for now Orange County is going its own way.

With so much new Class A office space recently completed and more expected soon, coupled with numerous sales of buildings at record prices, many landlords are challenged to generate even average returns. The overall vacancy rate has been rising, due to thousands of mortgage industry layoffs, slow job growth and the completion of new space that’s already come on-line. The Anaheim Stadium submarket in north central Orange County, which includes The City in Orange, is the county’s most troubled.  The Class A vacancy rate is 16% on a base 3.17 million square feet in 22 buildings. Even if the pace of average annual net absorption of 200,000 square feet were to immediately resume, there’s enough inventory for three years. But with an abundance of small mortgage companies in this submarket there is a strong likelihood the vacancy rate in this submarket will continue to rise.Not all submarkets are the same. In Newport Center buildings command consistently higher than average rents and occupancy rates. At the end of the second quarter only 4.2% of Newport Center’s Class A space was available, and last year its rents began breaking the $5 per-square-foot barrier. Overall countywide there will be a significantly increased level of supply of Class A office that could prove to be a challenge to some landlords for several years.

Moreover, it’s clear that for owners who have paid upward of $400 per square foot for premium office buildings they will have difficulty producing satisfactory returns unless there is continued significant rent growth and healthy appreciation in value. In this regard, the outlook is questionable.