Office Glut Worsens So That Even Japan Looks Elsewhere, Report Says
It’s so hard to find tenants for office buildings in Orange County these days that even the Japanese, who are big buyers of office buildings, are looking for other types of investments.
That’s according to Grubb & Ellis Commercial Real Estate Services, a broker that released a first-quarter report on the county market Tuesday.
In the central county, even though few new office buildings have been built in the last year and a half, offices “haven’t performed up to par,” said Lonnie Riddle, a senior market consultant for the brokerage.
Tenants continue to lease a lot of space, Grubb & Ellis and other market specialists said, but the problem is that there are just too many office buildings available.
The vacancy rate for the county’s larger and newer buildings was 22% during the first three months of 1990, down from 23% a year ago, according to the Grubb report.
Tenants filled an additional 1.2 million square feet of space during the quarter, more than at any time since the record year of 1988. If that pace continues, Grubb said, 1990’s leasing activity could exceed 1988, when tenants filled 3.6 million square feet of space.
But that pace may not be possible to maintain. One reason the first-quarter total was so high is that it included 250,000 square feet leased by American Savings in Irvine. Not only was that a one-time splash, but the thrift is not really leasing from a stranger: A sister corporation bought the buildings and is leasing them to American.
Where is most of this office leasing going on? Around John Wayne Airport, which continues to get more new tenants than other parts of the county. But it also gets more new office buildings to fill.
Big developers are not panicking, but obtaining financing for constructing a building is harder than in years, said Grubb brokers, who also saw these problems:
* Office rents, by one estimate, have come down so far that they have reached 1985 levels, as landlords try to lure tenants in the door.
* Some of the big insurance companies and others that formed partnerships with local developers to build offices are bailing out, selling their interests in the buildings.
* The Japanese once bought mostly impressive office buildings in big-city downtowns but are now looking at the market for residential properties, the Grubb report said. They are buying apartments and even forming joint ventures with home builders.
Even though the Japanese are generally satisfied with slimmer returns on their investment than are U.S. real estate investors, office investments were not even satisfying those modest expectations, Riddle said.
* Vacancies in industrial buildings and research and development buildings are considerably lower than in offices. Rents are lower for these types of buildings, and land in Orange County is scarce and expensive, so it’s tough to make a profit building them.
Consequently, there is less of an oversupply, and the supply may get even tighter, said John Brodbeck, research director for Grubb & Ellis in Orange County.
Vacancy rates for these buildings were about 15% in the first quarter. If construction of new buildings stays low, vacancies “could hit single digits by 1991,” Brodbeck said.
OFFICE OCCUPANCY
The office vacancy rate in Orange County was 22% in the first quarter, down from 23% for the same three-month period a year ago. Tenants occupied an additional 1.2 million square feet of space during the quarter. Still, there is more than 10.1 million square feet of space available.
SQUARE FOOTAGE VACANT
1st Qtr. ’89 4th Qtr. ’89 1st Qtr. ’90 North 1,036,000 637,000 810,059 Central 3,403,000 3,261,000 3,067,144 Airport 4,458,000 4,959,000 4,192,651 West 771,000 804,000 785,376 South 681,000 909,000 1,275,252 Total 10,349,000 10,570,000 10,130,482
Source: Grubb & Ellis
