Office Impetus Shifts : Commercial Builders Are Focusing on South County

South Orange County’s long-promised future as a major office and commercial center appears to be dawning, according to a Laguna Hills real estate research firm.

In a recent report, the Research Network cited a low, 11.1% vacancy rate in office buildings in the area stretching from El Toro to San Clemente and a flurry of residential construction to support its prediction that office builders will begin looking south in coming months.

“Also adding impetus to office development in the south county,” the report said, “is people’s desire to stay off freeways during morning and evening rush hours. Because of traffic, companies want to move closer to their employees, and many of those employees are, or soon will be, living in south county areas.”

20.2% Empty Countywide

By comparison, 20.2% of the 41.5 million square feet of office space available countywide is empty, said Matthew Disston, co-owner of the research firm. The commercial brokerage industry generally considers a 10% office vacancy rate to be normal--meaning that rates below that are considered to represent full occupancy, while higher vacancy levels indicate a softening of demand.

Breaking the county into regions, Disston reported a 40.5% vacancy rate for offices in the Irvine Spectrum; a 27% rate in the north county; 21.5% in the central county; 20.2% near John Wayne Airport, and 17.5% in the western county.

His numbers, collected during August, update and support earlier vacancy figures reported at midyear by the commercial divisions of two major real estate brokerages, Coldwell Banker and Grubb & Ellis.

Disston differs with those earlier reports, however, by predicting a fairly steep drop in office demand for the last half of the year and the first quarter of 1989.

“Although our survey reflects the continuing strength of the county’s office market, relative to other major urban areas throughout the nation, we believe that absorption (leasing) of new office space may drop by as much as 50% in the second half of the year, compared to the first half,” he said.

In the first six months of 1988, new leases accounted for more than 2 million square feet of office space throughout the county.

Disston said he mainly based his projection of a significant leasing decline on two factors: The overall vacancy rate is above 20%, and average lease rates have “stagnated for the past 18 months at about $1.76 per square foot.”

Steady Gains Predicted

But George Economos, senior marketing consultant in the office division of Grubb & Ellis, disagreed, holding with his company’s June prediction that office leasing would continue at a near-record pace through the end of the year in the county.

“Lease rates have been stagnant, but that’s because there has been quite a bit of new building going on,” Economos said.

“But I see no reason why the absorption rate would drop. It may be off a little from the first half, but I expect it to be over 1.5 million square feet for the last six months.”

ORANGE COUNTY OFFICE MARKET

Airport Spectrum North West Central Area Area Existing office space 2.9 4.4 12.8 18.7 0.1 (Millions of square feet) Total Buildings Existing 48 88 227 251 2 Square Feet Vacant 0.8 0.8 2.8 3.8 0.05 (In millions) Percent Vacant 27.0 17.5 21.5 20.2 40.5 Weighted Average $1.57 $1.72 $1.57 $1.96 $1.72 Lease Rate

South County Total Existing office space 2.7 41.5 (Millions of square feet) Total Buildings Existing 105 721 Square Feet Vacant 0.3 8.4 (In millions) Percent Vacant 11.1 20.2 Weighted Average $1.69 $1.76 Lease Rate

Source: The Research Network Ltd.