Vacancy Rate for Office Space Hovers at 20% : Two Surveys Show It’s Still a Tenant’s Market

In the expanding market for office space in Orange County, it is still a tenant’s market, according to a pair of surveys of office-leasing trends during the first quarter of the year.

Although the studies, conducted by Coldwell Banker and Grubb & Ellis, used different methods, the two firms generally agreed on the amount of vacant office space in the county--about 20%.

Coldwell Banker, which surveyed 600 buildings of more than 30,000 square feet each, showed the vacancy level remaining at its fourth-quarter level of 19.3% out of a total of 34.1 million square feet of office space available.

Grubb & Ellis--which measured only buildings over 25,000 square feet built after 1975--showed vacancies declining from 23% at the end of 1985 to 20%.

Vacancy rates varied widely around the county, according to the Coldwell Banker report. Of the cities surveyed, Anaheim had the highest rate--23.8%--and Newport Beach had the lowest--7%.

“Orange County is reasonably healthy from a demand point of view,” said Scott Perley, vice president and manager of Coldwell Banker’s Santa Ana office, “but it’s still a tenant’s market because of the abundance of available space.”

Despite the county’s vacancy rate, spokesmen for both companies said the county’s ratio of office space to availability was not cause for concern. Perley and Michael Dorsey, a vice president with Grubb & Ellis’ Newport Beach office, cited the absorption rate of newly built space as an indicator that demand for office space was strong.

The absorption rate measures the amount of newly built office space that is leased during a particular period.

Perley said that during the first quarter, 790,000 square feet of new office space was absorbed and, from the end of the first quarter in 1985 to the end of 1986’s first quarter, more than 3 million square feet of newly built office space was leased.

The rate of absorption, Perley said, has remained fairly constant over the last three years. “(The rate of absorption) is up over the last four quarters. That’s a good trend.”

From Grubb & Ellis’ findings, Dorsey identified the net absorption rate of space as the key factor in analyzing the health of the Orange County market. To determine the net absorption rate, Grubb and Ellis subtracted from the total new space leased during the quarter the square footage left vacant by companies that moved from existing buildings into the new offices.

That figure, Dorsey said, was 1.2 million square feet, compared to 276,000 square feet during the first quarter last year.

In a separate study prepared for the real estate development firm of McCarter-Burke by the Laguna Hills-based Research Network, researcher Matthew Disston reached similar conclusions.

“What we’re seeing is a lot of tenant churn,” Disston said. “Tenants are moving out of older buildings into newer and nicer buildings because the rental rates have been flat for the last year. Some of the new space leased was at the expense of vacancies in older buildings.” But, overall, the studies agree that the market in Orange County is strong, particularly when compared to other parts of the state.

“The Orange County market is one of the most dynamic markets, not only in California but in the United States,” Dorsey said. Judging from the level of leasing, he said, “San Diego is not as active or as healthy as Orange County, nor is Los Angeles.”

Coldwell Banker’s findings for San Diego showed the city with a vacancy rate of 22.5% out of approximately 14 million square feet of office space and Los Angeles with a 16.3% vacancy rate on 103 million square feet. “While Los Angeles’ (vacancy) rate is lower than Orange County’s, they’re absorbing space at a slower rate. (Orange County) is doing OK on absorption. Certainly we’re not suffering the things Houston is suffering.”

Perley cited Houston’s dependence on energy industries--and the current slump in oil prices--as reasons for the “tremendous problem” Houston has in finding tenants for its office space. Houston has a 28% vacancy rate on 139 million square feet of space.

For the quarter, Perley said, a total of 4.9 million square feet of new office space was under construction in Orange County, down from 6.5 million square feet of new construction nine months ago. Grubb & Ellis puts the new construction figure at 7 million square feet.

“This (drop in new construction) doesn’t affect the absorption rate,” Perley said, “but, over a period of time, it will keep the supply within reason.”

Dorsey said that he is cautious about predicting the stability of the county’s vacancy rate through the rest of the year but added that “with the expected influx of new inventory, vacancies will start creeping back up.”