Office Space Glut Forces Rents Down to ’85 Rates
So many of the county’s big office buildings have high vacancy rates--and so competitive has the local office market become in its search for tenants--that landlords are charging about the same rents they were in 1985.
According to a recent market study that examined 116 markets nationwide, many cities--and especially suburban areas such as Orange County--continue to struggle with an oversupply of office space.
The report was prepared by the New York market research firm Landauer Associates Inc. for the Society of Industrial and Office Realtors, a Washington professional association. Members of the Orange County group released the study here Wednesday.
Here are some of the group’s other findings about Orange County:
* Leasing activity was down “greatly” last year contrasted with 1988. Construction in North and Central Orange County virtually stopped. Construction continued strong around John Wayne Airport and the less-developed South County “even though the present level of demand did not warrant the growth.”
* Of the 48 million square feet of office space in the county’s larger, newer buildings, 10 million was vacant last year, for a vacancy rate of 21.5%.
* Landlords offered incentives that cut tenants’ rents by up to 25%, including several months of free rents, picking up the tenants’ old leases and office improvements.
* Some big insurance companies and others that built office buildings with local developers have put their interest in those buildings up for sale, so worried are they about the prospects for the office market.
In the industrial market, nearly 13 million square feet of new space for research and development, warehouses and factories was leased.
“Even so,” the report says, “demand appeared to be down from its 1988 level. Part of the reason may be the high proportion of research and development activity (in Orange County), which is especially vulnerable to the looming downturn in defense.”
Dollars spent on leasing R&D; space, as it’s called, dropped 15% last year.
As for the future, prices for land for industrial buildings continue to increase. That’s the case even though these buildings must charge lower rents than offices; the land is still sold in what the report calls an “auction atmosphere.” A shortage of land means fewer industrial buildings will be built on the speculation that tenants can be found for them.
“The south part of the county, which is controlled by a few major landholders, will have the largest share of the activity,” the report says.
In the office market, the report predicts steeper declines in rents and increasing concessions by landlords. It is “paradoxical,” the report says, that construction is still expected to increase 5% to 10%. Nine major projects are proposed for the airport area alone.
“Ironically, the slow growth/no growth movements sweeping the state of California are pushing builders to get into the ground quickly before the rules of the game change,” the section of the report on Orange County concludes. “Consequently, the probability of poorly planned projects exacerbating congestion and environmental problems is rising.”
INDUSTRIAL MARKET IN ORANGE COUNTY
Demand for industrial space, particularly in thg high-tech research and development sector, was substantially lower last year than in 1988, according to a survey commissioned by the Society of Office and Industrial Realtors.KEY MARKET SECTOR FACE OVERSUPPLY
The supply of industrial properties smaller that 40,000 square feet moderately exceeded demand, while R&D; space was in substancial oversupply last year.1989 CONSTRUCTION
Warehouse/Distribution: down 10%
Manufacturing: down 10%
High tech R/D: up 10%
1989 SALES VOLUME
Warehouse/Distribution: down 10%
Manufacturing: down 10%
High tech R/D: down 5%
1989 LEASING VOLUME
Warehouse/Distribution: down 10%
Manufacturing: down 10%
High tech R/D: down 15%
