Commercial Vacancy Rate Holds Steady : * Leasing: With office-building and industrial construction at a halt, empty space should decrease and rents should go up, Grubb & Ellis reports.
Orange County commercial real estate certainly has seen better days. But at least the percentage of unrented space hasn’t grown during the past year for office and industrial buildings, Grubb & Ellis Co. reported Thursday in the brokerage’s quarterly review.
And with office-building construction at a complete standstill in the third quarter, the brokerage said, vacancies should gradually decrease over the next two years--while rents simultaneously increase. In fact, some landlords now are rejecting tenants who demand lower-than-average rents that they might have gotten earlier this year. Landlords are starting to hold the line on current rents and offer fewer tenant concessions.
Despite a lack of construction, tenants have taken only 954,328 square feet of office space off the market during the first three quarters of this year, compared to 2 million square feet that was rented in 1990 through September. But the vacancy rate in Orange County’s office buildings was down only one point to 22%.
“Tenants are moving from one office building to another within the county, so they aren’t taking up any additional space,” said Mark Bennett, a tenant representative in the Irvine office of the San Francisco-based brokerage.
Office construction from June through September of this year was down to less than 100,000 square feet, from a high of 8 million square feet being built during the first quarter of 1986--the building boom year. Industrial construction has nose-dived to 300,000 square feet from a peak of more than 2 million in 1987.
Industrial space, which was not as overbuilt as office space during the ‘80s, has been taken off the market at a relatively steady pace over the past three years. About 11 million square feet of industrial space have been rented in 1991, compared to about 12 million through September of 1989.
“The office market isn’t pretty, but for the industrial market, it is not a gloom-and-doom scenario,” said David Knowlton, an industrial properties specialist in the company’s Anaheim office.
Almost 3 million square feet of available space in research and development buildings has been leased this year, down from 3.5 million square feet through the third quarter of 1990.
Other trends outlined by Grubb & Ellis brokers about Orange County’s commercial real estate market include:
* Many companies have extra space on their hands, either because of layoffs or because they have not expanded to the degree projected at the time leases were signed, said Robert Bach, the company’s director of research for the California region. So even after the economy improves and the companies grow, there may be a lag before vacancy rates change dramatically. “Tenants will have to fill up their existing space before they think about renting more,” Bach said.
* At least 10 large firms in the county with a glut of space currently are trying to sublet leftover offices at discounts of up to 40%, Bennett said. “They’re subletting office space they rented at the county’s average, $1.65 (per square foot), for bargain rates,” he added.
* Other companies have taken advantage of low rents by signing long-term leases with room to grow. “Many companies are occupying as much space as they can possibly justify with the idea that the economy will come back and their business will grow,” said George Spragins, senior vice president of the Newport Beach office.
* There will be no new office building construction beginning in Orange County for at least a year because lenders aren’t financing such projects--even if the developer can promise a large tenant. “Today, a developer would have to have 50% of the building pre-leased at $2 per square foot before a lender would even consider financing it,” Bennett said. Lenders wouldn’t settle for a 100% leased building if the rents were merely the current going rate, which does not produce a profit for most new buildings, he said. “They’re not going to give away space just to break ground.”
* Because some developers reduced the rents on their “benchmark buildings,” they have had to slash further the rates on their less-prestigious buildings, said Lonnie Riddle, senior marketing consultant in the Anaheim office. “When you start devaluing your best properties, that can only hurt the rest of your properties,” he said.
* However, office rents finally are starting to “firm up,” Spragins said. “This is something that has happened just in the last quarter. Rents aren’t dropping, and landlords aren’t giving quite as many concessions. By next summer, we should see rents start to increase. With new construction at a halt, the vacancy rate is going to have to come down eventually.”
* The hottest type of tenant in Orange County’s retail industry is the automotive shop owner, said Greg Mickelson, retail properties specialist in Newport Beach. “Over the past two years, we’ve seen a number of ‘car-care malls’ open--with a Midas, a Jiffy Lube and a Goodyear, for instance, all clustered together,” he said. “Before the property is even sold, it’s 80% to 100% leased.”
* In the industrial market, brokers are doing a lot more leasing than selling, said David Knowlton, industrial properties specialist in Anaheim. “Eighty-four percent of our activity is in leasing right now,” he said. “At today’s rents, it’s much more economic for an employer to lease a building than to buy one.” Furthermore, “financing (for purchases) is hard to come by.”
* Fewer industrial companies are relocating to the Inland Empire than there were 10 years ago, Knowlton said. “The rents in Riverside are no longer much lower than the rents in Orange County.”
Orange County’s Office Market
Office vacancy rates have remained stagnant in Orange County over the past year, down less than one percentage point to 22%. But office building construction dropped dramatically, as new starts have come to a halt due to lack of financing.
North: 3rd quarter 1991: 17.9% 3rd quarter 1990: 22% Central: 3rd quarter 1991: 21.5% 3rd quarter 1990: 21% South: 3rd quarter 1991: 26.2% 3rd quarter 1990: 30% Airport: 3rd quarter 1991: 22.5% 3rd quarter 1990: 23% West: 3rd quarter 1991: 20.8 3rd quarter 1990: 22%
SOURCE: Grubb & Ellis Co.
