Despite a Glut of Office Space, Businesses Gobbling It Up at Record Rate, Study Says
Although the market is still glutted with office space, companies in Orange County have been devouring it at a record pace this year, with expensive new office towers benefiting most from a flurry of relocations, according to researchers at Grubb & Ellis Co.
And a similar high level of demand, both from local firms and from companies moving into the county, has resulted in a significant year-to-year drop in vacancy rates for industrial and research and development space throughout the county, the real estate brokerage’s commercial services division reported Tuesday in its midyear review and forecast for the county.
In all, the market for non-residential real estate in the county remains one of the healthiest in the nation and should continue at a similar pace through the rest of the year, said Dennis Macheski, research director for Grubb & Ellis’ Pacific Southwest regional headquarters in Irvine.
With a 10% vacancy factor considered normal in the industrial market--meaning that vacancy rates of 10% or lower are be considered full occupancy--the rate for traditional manufacturing and warehousing space in the county fell to 13% from 16% a year ago, while the rate for research and development space dropped to 17% from 23%, Macheski said.
In both cases, the vacancy rates fell even though total space increased.
The bulk of the industrial space is being sought by small, entrepreneurial firms whose owners see Orange County as a good place to live and a good place to recruit both management and blue-collar workers, said Craig Morris, a senior marketing consultant with Grubb & Ellis’ industrial division in Anaheim.
Additionally, he said, a number of larger firms have moved into the county from southeastern Los Angeles County, where industrial space is even harder to find.
The result is that the industrial market here is rapidly becoming a seller’s market.
But the office market remains heavily favorable to tenants in most areas of the county, largely because of the huge increase in new buildings coming on the market--a factor that drove office vacancy rates to 24% for the second quarter, the second-highest level in the past 18 months and three percentage points higher than the 21% rate reported for the second quarter last year. Even with the glut, the office market is so active that if current leasing levels keep up through the next six months, a record 4 million square feet of space could be absorbed during the year. Slightly more than 1 million square feet has been leased in each of the first two quarters, Grubb & Ellis reported.
By renting now, many tenants wrest considerable concessions from building owners. It is not unusual, for example, for a five-year office lease in the north and central areas of the county to include a rent-free first year, while six months of no rent is common on five-year leases in the area around the county’s John Wayne Airport.
The exception is in South Orange County, where a paucity of office space and little new construction has resulted in a low, 15% vacancy rate. “We recently negotiated a lease for 10,000 square feet in Laguna Niguel and had to really work hard to get one month of free rent for the client,” said George Spragins, a Grubb & Ellis vice president and district manager of the Newport Beach office.
He predicted, however, that office and industrial development both would increase substantially in the southern areas of the county in coming years.
Of the 40 million square feet of office space existing in the county, more than 40%--or 17 million square feet--has been built in the past three years. An additional 4 million square feet is currently under construction, Macheski said, and developers are so confident of the market’s overall strength that plans for 13 million square feet more are being processed.
Driving the office market, said Spragins, have been the internal expansions forcing a number of local companies to look for more space--particularly those, like legal and accounting firms, that provide services to other businesses. Additionally, said Macheski, as these local firms expand and mature, they are showing a greater desire for more luxurious surroundings and more square footage per employee.
In the office leasing market, the airport area, which encompasses Newport Beach and the South Coast Plaza business district as well, was most active during the second quarter. A net total of 520,638 square feet of office space in that region was leased during the second quarter--more than half the countywide total.
North Orange County, which has 3.5 million square feet of office space, posted the highest vacancy rate for the quarter, 31%.
Office Vacancy Rate in Orange County
2nd Q ’87 3rd Q ’87 4th Q ’87 1st Q ’88 Greater Airport Area 23% 24% 23% 26% South County 17% 16% 14% 16% Central County 18% 21% 23% 23% North County 25% 28% 30% 36% West County 21% 24% 23% 23% Orange County Total 21% 23% 23% 25%
2nd Q ’88 Greater Airport Area 24% South County 15% Central County 25% North County 31% West County 21% Orange County Total 24%
Source: Grubb & Ellis Research Services Group
