Commercial Real Estate Stagnant : Industry trends: First-quarter results reflect an ongoing pattern of high vacancy rates and low net absorption rates--as well as a virtual absence of construction.

After taking his turn bemoaning the condition of Orange County’s commercial real estate market, Jim Cunningham incongruously accused the media of writing only “gloom and doom” stories about the economy.

“This is my plea to you to say better things,” the real estate broker good-naturedly chided reporters Thursday at Grubb & Ellis Co.’s first-quarter briefing on the Orange County commercial market.

“Then you get better things to say,” fellow commercial broker George Spragins jokingly shot back.

But neither Cunningham nor the other members of Grubb & Ellis’ Orange County team had much good to say at the conference, held every three months by Grubb & Ellis’ Orange County brokerage officials to summarize the previous quarter and discuss current trends.

In keeping with the ongoing theme of the past year, the brokers reported high vacancy rates for office and industrial buildings and low net absorption rates.

Vacancy rates, however, have been high for several years now.

The commercial real estate phenomenon that 1992 will be remembered for is the virtual absence of construction.

During the first quarter, for the first time in the brokers’ memory, the amount of new office space under construction in Orange County hit zero. And only one industrial building--a 116,000-square-foot manufacturing and distribution facility in Fullerton--was under construction during the first quarter.

“We’d have to look back probably 30 years to find the last time that there were no speculative buildings under construction,” said Spragins, district manager for Grubb & Ellis’ Newport Beach office.

The vacancy rate for office space languished at 21.6% at the end of the first quarter of 1992, down just a nudge from 21.8% at the end of the first quarter of 1991. South County experienced the highest vacancy rate, 23.1%, while the western region of the county posted a low of 18.1%.

Industrial buildings in the county have an overall vacancy rate of 18.7%, up from 16.6% for the same period a year ago, the brokers said.

Vacancies in industrial complexes ranged from a high of 24% in South County to a low of 16.9% in the central part of the county.

The survey tracks only “speculative” buildings, those constructed without tenants already signed up. Built-to-suit buildings, constructed for specific tenants, are not included in the study.

Another indicator of bad times was the first quarter’s dwindling net absorption rate--the amount of office space taken off the market by new tenants. In the first three months of the year, 104,227 square feet of office space were leased--down from 190,841 square feet a year ago.

The airport area led the county in net absorption, with 154,936 square feet rented. But the central and northern parts of the county conspired to deflate the overall figure, respectively posting what brokers call “negative absorption” rates of 205,042 and 46,730 square feet.

Much of the negative absorption in the county’s central region can be attributed to Pacific Bell’s move out of a 154,000-square-foot speculative building in Orange to a built-to-suit building in Anaheim.

The real surprise regarding net absorption of office space is that the figures aren’t lower, said Robert Bach, regional director of research for Grubb & Ellis.

“From February of 1991 to February of 1992, Orange County lost 30,800 jobs,” Bach said. Of that total, 6,500 were jobs for employees who work in office buildings.

Applying the real estate formula that allows for 250 square feet of office space per employee, Bach said, “the county should have had a negative absorption of 1.6 million square feet, if there were a direct correlation between job loss and absorption.”

But employers who must resort to layoffs don’t always move into smaller office space, Bach pointed out. “Many have leases they can’t get out of that quickly,” he said. “Others have such a good deal on their lease that they’re holding onto their space, waiting for a time when they can rehire. There are a lot of empty cubicles in office buildings today.”

Therefore, he said, when the economy does improve, net absorption will take a while to catch up. “These offices are going to have to refill their space before there is a demand for new space,” Bach said.

As landlords optimistically await that rosier time, they have become increasingly reluctant to accept long-term leases that are highly favorable to the tenant, said Jack McNutt, an office broker in Grubb & Ellis’ Newport Beach office.

“It makes more sense for landlords to do shorter-term leases and renew later than to lock themselves into 10-year leases at today’s rates,” he said.

Orange County’s Office Market Countywide vacancy rates for the first quarter of the year were slightly lower than last year, with South County and western Orange County showing the biggest improvements in office occupancy rates. Vacancy rates

1st Quarter 1992 1st Quarter 1991 Airport 22.2% 21.8% South County 23.1 26.9 Central County 21.7 19.8 North County 19.1 21.9 West County 18.1 21.9 County Total 21.6 21.8

Under Construction No new construction in first quarter

Absorption The amount of office space taken off the market by new tenents, in thousands of square feet, by quarter.

‘92: 104

Source: Grubb & Ellis Research Services Group Researched by DALLAS M. JACKSON / Los Angeles Times