Office Leasing Drops 85%; Vacancy Rates Unaltered

Here’s another casualty from the anxiety over the war and the economy: office leasing.

Nervous tenants took an unusually small amount of space off the market--an 85% drop compared to last year--during the first three months of 1991, broker Grubb & Ellis Co. said Thursday in a quarterly survey.

The vacancy rate, however, was unchanged because construction of new offices is way down too, according to the survey prepared by the Orange County offices of the commercial real estate brokerage.

And that means the market may begin turning around next year or the year after, the brokerage said, as tenants use up the vast oversupply of office space.

Here are the figures:

* Tenants took an additional 191,000 square feet off the local office market during the first quarter. During the 1990 first quarter, the figure was 1.2 million square feet.

* Two-thirds of the space that rented was in cities in the northern half of the county--about 147,000 square feet. Usually the John Wayne Airport area leads in this category. But the airport area actually lost some tenants this quarter--about 18,000 square feet worth.

* The office vacancy rate was 22%, the same as last year. That meant 10.5 million square feet were empty of the 52.4 million feet available in the county’s 656 larger, newer office buildings.

* While overall job growth dropped 0.5% in Orange County from a year ago, office employment was still growing, although at the much slower rate of 2.4% compared to 6.3% a year ago.

* About 2.3 million square feet of office space were under construction in the first quarter; that’s down drastically from 3.9 million square feet a year ago.

Construction is expected to continue to drop, the brokerage said, since there’s little demand now and few loans available to developers anyway.

The construction drop is especially acute in the central part of the county: An office tower hasn’t come on the market in Anaheim or Santa Ana since 1988. Consequently, vacancies are starting to drop slightly in the area and rental rates are rising, brokers say.

In the industrial building market, Orange County landlords fared better: About 2.8 million square feet of factories and warehouses were sold or leased during the quarter, up from 2.2 million a year ago.

But the market was bad for another type of industrial building--research and development space--used by cleaner, high-tech industries. Only 674,000 square feet were leased or sold during the quarter, down from 1.5 million a year ago.

The market for retail buildings, meanwhile, was spotty. In smaller shopping centers in less desirable locations, lease rates have been in “a free fall” but are starting to improve, said Greg Mickelson, a Grubb broker.

Some retail businesses that are hot in most parts of the county, according to Mickelson, are supermarkets, gas stations, fast food restaurants and merchandisers of home-improvement supplies.

Cold businesses in many parts of the county include furniture and home furnishings stores, sporting goods stores and specialty shops.

Hot markets include Mission Viejo, Laguna Niguel and Rancho Santa Margarita, all driven by population increases from the homes being built there. In the northern half of the county, the affluent areas of Yorba Linda, east Anaheim and Brea are hot because of several new shopping centers.

Cold markets, says Mickelson, are Garden Grove and Huntington Beach. Santa Ana was not doing very well but is making a comeback, he said.

ORANGE COUNTY OFFICE MARKET Although there was little leasing activity in the first quarter of 1991, the slow pace of construction kept vacancy rates stable.

Buildings Vacancy Under Absorption Market Area Rate Construction Sq. Ft. to Date Airport Area 21.8% 6 -18,123 South County 26.9% 1 14,515 Central County 19.8% 1 3,037 North County 21.9% 1 146,935 West County 21.9% 2 44,477 County total 21.8% 11 190,841

Source: Grubb & Ellis SPACE UNDER CONSTRUCTION Office space being built in the area around John Wayne Airport accounts for more than 80% of the construction under way in Orange County. Airport Area: 1,865,142 South County: 64,500 Central County: 196,476 North County: 94,365 West County: 65,000