Orange County tenants last year leased the smallest amount of new office space in five years, according to a year-end survey released Thursday by commercial real estate brokerage Grubb & Ellis Co.
About 2.5 million square feet of office space was taken off the market last year by tenants, 17% less than 1989’s 3 million square feet but still enough to make Orange County one of the nation’s busiest office markets.
Absorption, as the statistic is called, hit a peak in 1987 at 3.9 million square feet and has been dropping since. It will not hit that peak again soon, the brokerage said. “The growth rate of the late 1980s was simply not sustainable,” said Dennis W. Macheski, former director of research for Grubb’s southwestern region. Macheski is now with accounting firm Price Waterhouse.
The result is that empty space in the county’s larger and newer office buildings hit a new high last year at 11.6 million square feet. That’s equal to nearly 600 floors of the average 10-story high-rise office building in the county.
The vacancy rate was 23% for the year, up from 21% last year. The average rate for the nation’s suburban markets was 19.4% in 1990.
Orange County’s employment growth in the major office-using industries has been strong--in fact, the strongest of any of the nation’s larger urban markets last year, Macheski said.
But a wave of construction has kept the vacancy rate high despite the influx of new office users. Last year 2.9 million square feet was under construction in the county, according to the Grubb & Ellis survey, down from 3.2 million in 1989 but still high enough to depress rents and cause cash-flow problems for some building owners.
At least five big high-rises in the county are for sale, brokers say.
Construction is falling because it’s harder for builders to borrow money because of problems facing banks and thrifts or to find partners with money to invest. Eventually the market should lurch back into a more equal balance between supply and demand, experts say.
But that won’t happen this year, Macheski said. Absorption will be in the range of 2 million square feet, he said, while the “vacancy rate will remain in the low 20% range and rents stay soft.”
One of the stronger markets in the county was its new “downtown” area, the cluster of offices around John Wayne Airport, where the vacancy rate was 22%.
But the cities of Anaheim, Santa Ana and Orange, the county’s second-largest office market, show some of the best signs for an imminent improvement.
There is little new construction in the three-city area--only one high-rise is now being built--and the vacancy rate last year was 21% and will probably drop still further this year, brokers say.
“There has been an incredible decrease in construction,” said broker Michael J. Merk. “It’s like the tap’s been shut off.”
The slump also hit industrial buildings--warehouses and related space--in the county, Grubb & Ellis said. Uncertainty about the economy and the shrinking of the aerospace industry meant sales and leases of industrial buildings and the more upscale research and development buildings dropped last year. Absorption of industrial space fell this year to 15.2 million square feet, down from a peak of 22.3 million square feet of industrial space in 1987.
Orange County’s Office Market ABSORPTION RATES A market’s absorption rate is a measure of its long-term viability. It represents the amount of newly built or vacant space that is leased or otherwise taken off the market. When construction exceeds absorption--as it has for five of the last six years--vacancy rates rise. ORANGE COUNTY’S OFFICE MARKET 1990 VACANCY RATES Grubb & Ellis divides the county into five submarkets. Airport: 22% South: 27% Central: 21% North: 25% West: 23% AN EXCESS OF SPACE Office vacancy rates in the county have exceeded 20% for six years running, despite a steady decline in the pace of construction. Construction In millions of Square feet 1985: 4,013,000 1986: 4,183,000 1987: 4,065,000 1988: 3,557,000 1989: 3,163,244 1990: 2,939,458 Vacancy Rates 1985: 23% 1986: 24 1987: 23 1988: 23 1989: 21 1990: 23 Source: Grubb & Ellis