Office Vacancies to Stay High, Brokers Say : Commercial property: Tenants this year will probably take less than 2.75 million square feet off the market, Grubb & Ellis says. Rents are stagnant.
Tenants will probably rent less office space in Orange County in 1990 than in any year since 1985.
That was the word Tuesday from Grubb & Ellis Co., a big commercial real estate broker that tracks the local market.
After the frantic building boom of the mid-1980s, 23% of the space in the county’s 660 largest buildings is now empty. That amounts to nearly 11 million square feet, the equivalent of more than 500 floors of the average high-rise office building.
Tenants this year will probably take less than 2.75 million square feet off the market, Grubb & Ellis said. Previously, tenants removed at least 3 million square feet from the market almost every year since the recession of 1982.
With so much space empty, office rents have remained stagnant since the mid-’80s as landlords have had to compete for tenants.
There is, however, a bright spot: There is less construction of new buildings now, largely because most lenders are no longer lending for big real estate projects.
Grubb & Ellis researchers said that if demand remains healthy in Orange County--and if, for instance, the recession many economists forecast is milder than expected--then tenants will take up a dwindling supply of office space and vacancy rates should start declining.
In fact, that has already started to happen in central Orange County in Anaheim and Santa Ana, Grubb & Ellis said. There have been few office buildings built there in the last few years, and rents are rising in those cities, said Steven Ames, a Grubb & Ellis broker in Anaheim.
In addition, some tenants, he said, may start migrating to cheaper places, particularly around John Wayne Airport --the county’s new “downtown”--or to South Orange County, where a lot of new construction has pushed office vacancy rates to a sky-high 30%.
Developers and their lenders in Southern California became accustomed to a high demand for office space in the mid-’80s. In Orange County, for instance, tenants such as law firms and accountants would each year occupy 7% more office space than the year before.
That trend is something most other places in the nation could only envy, said Dennis W. Macheski, a Grubb & Ellis research director. For most cities, the average is less than 4% a year, Macheski said.
Now, though, it looks as if local developers will have to get used to a more modest growth in office demand, at least for the time being, many brokers said. They believe, they said, that the county’s economy can’t sustain such a high rate of growth.
Rents are also flat for stores, Grubb & Ellis said. Once, tenants were lined up to lease retail space, particularly in the booming southern portion of the county. But no more.
“Leasing is good to fair, compared to the overheated market of the past,” said John Davidson, a Grubb & Ellis broker in Newport Beach.
Demand is also slowing for factory and warehouse space, the brokerage said. Those types of buildings are experiencing a vacancy rate of 14% as some tenants shun this county’s high rents in favor of cheaper quarters in Riverside or San Bernardino counties.
What all this means for brokers is that the big firms will stay relatively strong but that some smaller ones may not survive, said George S. Spragins, Grubb & Ellis’ district manager. During hard times, tenants tend to go more often to large firms such as Grubb and Coldwell Banker, Grubb’s biggest rival in Orange County, Spragins said. Grubb’s business is actually up this year, he said.
The new tougher market has even spawned a term for the way most brokers must do business these days: “bottom fishing.”
“You’re scraping for smaller deals and working harder and longer to put them together,” said a broker for one of Grubb & Ellis’ rivals. “If you do that, you can make it in this market.”
OVERSUPPLY OF OFFICE SPACE
