Office Space: There’s Big Supply, Demand

Orange County tenants wanted less office space during the first three months of this year than during 1987’s record-setting first quarter, but demand remained strong nonetheless.

To meet it, developers are planning or already building 16 million square feet of office space in the county, according to a survey released Tuesday by Grubb & Ellis Co., a real estate broker. That is on top of 39 million square feet already in place.

By comparison, downtown Los Angeles has only 25 million square feet of office space.

So many new office buildings opened during the first quarter of the year that the vacancy rate rose to 25% from 22% a year earlier. That meant about 10 million square feet was vacant during the quarter.

Some developers may be rushing to beat a pending slow-growth initiative, said Michael R. Dorsey of Grubb & Ellis.

“There’s a definite sense of urgency out there,” said Dorsey, especially in unincorporated areas of the south county where the initiative would have the most effect.

According to the survey, tenants took a net 1 million square feet off the market during the quarter, the second-highest amount in county history.

The record was set a year earlier, when tenants grabbed a net 1.5 million square feet.

This year’s first-quarter demand--though lower--was still the second-highest on record and indicates a very strong office market, said David R. Hibbard, a Grubb & Ellis vice president.

That view was generally endorsed by other experts Tuesday, though some said they were worried that the construction boom might eventually cause the vacancy rate to soar still further.

“Still, the prices for buildings haven’t budged yet,” said Thomas Tucker of accounting firm Laventhol & Horwath.

“There’s a lot of capital in the market for buildings right now,” he said.

The first quarter’s strong demand for office space surprised Grubb & Ellis, whose brokers had suspected that tenants might be harder to find this year for several reasons. Among them: Corporate executives cautious about expanding in the nearly unprecedented sixth year of a recovery; October’s stock market crash, and slower local and national economies.

Last year the net demand for office space reached a record 3.9 million square feet, much of it in the booming John Wayne Airport area. The neighborhood is also where most of the new office construction is planned, Grubb & Ellis said.

But it is unlikely 1988 demand will surpass 1987, Grubb & Ellis executives said.

The slow-growth initiative--which would generally permit new construction only where roads and other services can accommodate it--has already soured a couple of office construction projects, Dorsey said.

“I’ve already seen two deals fall through in the south county because the developers were not comfortable with the political environment,” he said.

COUNTY OFFICE SPACE BY REGION

Rentable Vacancy Region Square Feet Rate Airport Area 18,412,634 26% South County 2,359,317 16% Central County 11,484,823 23% North County 3,476,001 36% West County 3,639,811 23% TOTAL 39,372,586 25%

Source: Grubb & Ellis