County Office Space Glut Pushes Rents Down 3.6% . . .

Looking for a little office space?

Orange County’s commercial developers may have a deal.

It costs 3.6% less to rent the average new office in Orange County than it did at the end of 1986, according to a recent Coldwell Banker report.

Developers have built so many office buildings in the county that they have millions of square feet of empty space on their hands and have been lowering rents to fill the space.

Tenants continue to gobble up office space rapidly, but not quite rapidly enough. Despite leasing 2.9 million square feet of new office space through September--a record--local office buildings continued to run a vacancy rate in the 20% range.

“Currently, the tenant has the edge in terms of negotiating a lease,” said Frank Ryan, regional sales manager for Norris Beggs & Simpson, a commercial real estate firm in Newport Beach.

To lure tenants into their buildings, owners are offering inducements such as free rent during the first part of the lease. They are also spending more to customize offices for tenants. Lease rates, which averaged $1.69 per square foot as late as the end of 1986, are now down to $1.63.

The vacancy rate for big office buildings in the county actually fell slightly to 20.9% during the third quarter from 21.9% in the second quarter, according to Coldwell Banker. But that was because fewer office buildings were finished and came on the market during July, August and September, the real estate company said.

As more buildings are finished in the fall and through the early part of 1988, the vacancy rate is expected to rise again. Even if developers stopped building right now, there would be enough vacant office space to last for more than two years, Coldwell Banker estimated in its report.

Another problem: Fearful of a recession brought on by October’s stock market crash, some companies may delay expansion plans that would increase office space.

“It’s a little too early to see it, but I certainly expect some of that,” said Scott Perley, a vice president for Coldwell Banker in Santa Ana. “Companies will be looking for lower demand and lower consumer spending, and they’ll adjust their plans accordingly.”

But hardly anyone is projecting a big slowdown in office construction. Developers seem willing to bet that Orange County’s traditionally strong economic growth means there will always be companies looking for office space. And there are still plenty of lenders willing to make loans for new offices, experts said, one big factor behind the tidal wave of office construction.

“People have got their construction loans, and they figure ‘go out and build something,’ ” said Alfred Gobar, a Brea real estate consultant. “Frankly I’ve never understood this, because the vacancy rate is high and is going to be rising for some time.”

On the bright side, Orange County’s problems aren’t all that far out of line with other suburban areas nationally, where the average vacancy rate was 23% in the third quarter and concessions were also being waved at prospective tenants.

In an economic downturn, affluent Orange County is widely expected to be less affected than much of the rest of the nation, hurting local demand for offices less.

And the party for renters can’t last forever, leasing experts such as Ryan said.

“When the gap between the supply of office space and the demand is lowered, as it will eventually,” he said, “those concessions are going to go.”