22% of County Office Space Empty in 3rd Quarter; Rents Show Drop

More than a fifth of the space in Orange County office buildings was empty during the third quarter, good news for companies seeking cheap space but bad news for building owners.

The vacancy rate has been stuck in the low 20% range for several years, which keeps rents low. It was 22% in the third quarter, Grubb & Ellis Commercial Real Estate Services said Tuesday, up slightly from 21% in the second quarter. A year ago, the vacancy rate was 25%.

On the other hand, there have been plenty of tenants in the Orange County market. In the three months ended Sept. 30, companies leased 686,000 square feet of office space. That is an amount equal to more than two of the typical big office buildings that etch the county’s skyline.

Busiest Sector

The part of the county that was busiest during the third quarter was the southern half, where tenants leased 216,000 square feet. That was more than they had leased in the first and second quarters combined.

The South County market--where most new homes are being built--can also expect an explosion of office construction to meet the increase in demand, Grubb & Ellis said. Companies are moving to the South County to be nearer their employees’ homes.

“What we saw last quarter in South County was the beginning of a wave,” said Dennis Macheski, director of research for the brokerage’s southwestern region. “The shift has begun.”

Office rents, however, are still depressed because of the vast amount of space on the market. In some areas, they are down an estimated 10% to 15% just from the spring.

Meanwhile, there are still a lot of new buildings going up. So the prospects for the next few years are high vacancy rates and low rents despite strong demand, Grubb & Ellis said.

The real estate consulting company noted other big changes in the commercial market in the last few months. The biggest: The Japanese investors who have bought many of the region’s largest office buildings and hotels have been joined by buyers from Hong Kong, Singapore and other Asian areas.

A Hong Kong company, for example, recently bought the Columbia Landmark building near Koll Center Irvine North.

Moving Into County

Lately these investors have been moving into Orange County because many of the buildings in big cities, such as Los Angeles and New York, have already been snapped up.

Last year, for instance, half of all office buildings bought in the county were purchased by foreigners, Grubb & Ellis said. So far this year 80% of all the buildings purchased were bought by Japanese.

Because of the high vacancy rates in the county and because the competition for buildings is somewhat less intense than in bigger cities, foreign investors can pick up buildings at relatively much cheaper prices.

This year is likely to see a slight cooling off in terms of office leasing, Grubb & Ellis said. Last year the brokerage counted 3.6-million square feet of space leased. If leasing continues at this year’s rate, it will only reach 3.2 million square feet.

Still, Orange County remains one of the busiest markets in the nation. Among Grubb & Ellis’ markets in the Southwestern states, Orange County topped both downtown Los Angeles and San Diego County in office space leased during the last six months.

Tenants leased 1.9 million square feet in the county, 1.4 million in the downtown Los Angeles, Mid-Wilshire, Glendale and San Gabriel Valley market and 1.3 million in San Diego.

MIDYEAR 1989 OFFICE SPACE (In square feet)

Available Annualized Total (Direct Lease % Growth Rate in Existing Space Only) Available Occupied Sq. Ft. Ventura County 4,790,000 740,000 15.4 9.0% Orange County 46,963,000 10,013,000 21.3 10.5 Inland Empire 7,252,000 1,837,000 25.3 17.5 L.A. County 134,327,000 20,798,000 15.5 6.0 San Diego County 33,185,000 6,950,000 20.9 9.8 Southland* 226,517,000 40,338,000 17.8 7.4

* Greater L.A. Basin plus San Diego County.

Source: Grubb & Ellis