Office Vacancies Could Hit 19%, Forecast Says

Orange County’s office vacancy rate could climb to 19% this year, creating a tenants’ market punctuated by stiff competition among developers and builders, according to a commercial real estate forecast released Wednesday.

“What we are seeing is record construction of new space,” said Harold A. Ellis, chairman and chief executive officer of Grubb & Ellis Co., at a presentation of his firm’s first Orange County forecast. Grubb & Ellis, which is based in San Francisco, is the nation’s third-largest real estate services firm.

However, the spate of office towers and research and development parks will be accompanied by a record demand for office and industrial space, Ellis said. That demand will continue to grow into 1986, according to the firm’s predictions.

To capture a share of that demand, however, developers will be offering potential tenants such lures as free rent and free parking. And developers and real estate investors will have to devise “better projects and better buildings” to compete, Ellis said.

Among the Grubb & Ellis predictions:

- The office space vacancy rate, which was 12% at the end of 1984, will increase to 19% by the end of this year. During the year, an additional 4.6 million square feet of office space will become available, bringing to more than 10 million the number of square feet of space built since the beginning of 1984.

- Demand for space in south Orange County, particularly around John Wayne Airport, will remain high. As that area becomes saturated, however, the central and northern parts of the county will benefit.

- The northern part of the county will be the fastest-growing area for industrial uses: space designed for high-technology businesses and for research and development will approach 1.5 million square feet, double the 1984 figure.

Grubb & Ellis’ forecast predicts that the northern part of the county, which has lower rents, more space and less traffic, will continue to attract a steady stream of maturing high-tech firms in need of manufacturing space away from the research and development parks in the southern part of the county. Rents for industrial space are 25% lower in north Orange County than in the Irvine area.

- The vacancy rate for research and development facilities may climb to 53% this year, with more than 7.3 million square feet of space to become available.

“Developers of high-tech space will need to structure aggressive leases with tenants, including free rent and above-standard tenant improvements,” said Robert McDonald, a senior marketing consultant in Ellis’ Newport Beach office. The lower leasing costs will attract corporate “back office” operations such as data processing away from the more expensive high-rises that house the companies’ executive offices.

- Vacancy rates at industrial sites in north Orange County, which were 8% at the end of 1984, will remain about the same. As more space is being taken by research and development companies, industrial space in the north Orange County and Irvine areas will become more expensive.

- In retailing, the most activity will be at renovated neighborhood shopping centers. And more “mom and pop” operations will have a harder time finding space as the influx of nationwide chain stores continues, according to the forecast. It will be “increasingly more difficult for the ‘mom and pop’ retailers to afford space in prime locations,” said Cody Small, a marketing consultant.

The larger chains, which have better financial backing and larger sales volumes, will be more attractive to developers, who typically take a percentage of sales. “The ‘mom and pop’ stores don’t have the cash . . . they don’t have the volume,” Small said.