'Bottom Year' Foreseen for Office Rentals : Leasing: A local broker says 1992 will be worse for landlords. But some indicators tell him there's a recovery due next year.

By SUSAN CHRISTIAN

July 10, 1992 12 AM PT

TIMES STAFF WRITER

NEWPORT BEACH —

The description may seem like a dubious honor. But broker George Economos says it’s better than it sounds: 1992, he said, will be remembered as the “bottom year.”

Although 1992 will be even worse than last year for landlords in terms of high office vacancies and low rents, it will be the last stop on the downhill grade before the office-leasing business starts the slow climb to recovery, Economos said in his company’s midyear briefing on the state of Orange County real estate.

“This will be the toughest year, but we should start seeing improvements from here on out,” said Economos, a senior vice president and office specialist in Newport Beach for Grubb & Ellis Commercial Real Estate Services.

Unlike last year, there are no new office buildings opening in 1992, so net absorption of space will probably end on a lower note than in 1991. But no new space means a gradual increase in demand for existing space, Economos said.

Net absorption is the increase or decrease of total square footage taken off the market by renters and buyers--considered a fairer barometer of activity than lease statistics, which don’t take into account space left vacant when a tenant moves from one building to another.

The construction industry will not see the benefits of a decrease in the current 21.7% vacancy rate until 1994 or 1995, Economos said. “Vacancy rates should fall about 1 1/2% per year, but even a 19% vacancy rate in 1993 is too high for building to start up again. Construction workers will be the last to see any benefits in this.”

Office vacancies for the corresponding quarter of 1991 stood at 20.8%. Net absorption for mid-1992 was 522,107 square feet, up from 378,958 square feet a year earlier. Grubb & Ellis analysts project that net absorption for this year, however, will be about 1.25 million, down from 1991’s 1.4 million.

“In the third and fourth quarters last year, some new buildings came on line that had major tenants waiting to take big chunks of space, which boosted the net absorption rate,” Economos said, explaining why 1992 will probably finish lower despite its stronger midyear showing.

Net absorption has taken a dive since mid-1990, when it was at 1.6 million square feet--more than 1991’s total for the entire year.

Industrial buildings have been hit even worse by the recession than office buildings, even though their vacancy rates are lower: 17.25% for all of Orange County.

“Three years ago, the vacancy rate for industrial buildings was 13%,” said Kevin Turner, an industrial properties specialist. “That has shot up.”

Still, he said, the vacancy rate appears to be leveling off. The mid-1991 rate was 17%.

“Because rents have gone down in Orange County, we’re not seeing the migration to the Inland Empire that we saw three years ago,” Turner said. The bulk of activity in the leasing and buying of industrial space has involved local manufacturers moving to larger facilities, he said.

A few years ago, when industrial space was much tighter, tenants took what they could get and did their own interior improvements. Today’s trend is for the landlord to assume such tasks as yanking out unneeded laboratories left behind by a former tenant, Turner said.

Landlords are also more willing to renegotiate rent rates to keep tenants in place. “If they lose a tenant, it’s very costly to retrofit an industrial building designed for a specific user,” Turner said.

On the retail side of commercial real estate, broker Mike Navarro said, most of what is being leased right now is “recycled space” vacated by stores and restaurants that have gone out of business.

Orange County’s Office Market

Countrywide, there were more vacant offices during the second quarter this year than a year ago. The airport and central county areas lost tenants, while south, north and west sections of the county gained tenants. North:

2nd-quarter 1991: 20.1%

2nd-quarter 1992: 16.6% Central:

2nd-quarter 1991: 18.6%

2nd-quarter 1992: 20.4% South:

2nd-quarter 1991: 27.0%

2nd-quarter 1992: 22.2% Airport:

2nd-quarter 1991: 20.5%

2nd-quarter 1992: 23.7% West:

2nd-quarter 1991: 22.6%

2nd-quarter 1991: 18.1% Total:

2nd-quarter 1991: 20.8%

2nd-quarter 1992: 21.7%