Office Vacancy Rate Dips by Almost 2 Points to 17.8% : Real estate: County’s commercial market strengthens in near-total absence of building activity.

The Orange County commercial real estate market continues to strengthen, with the office vacancy rate at midyear nearly two percentage points lower than it was a year ago, according to figures released Thursday.

Grubb & Ellis Commercial Real Estate Services in Newport Beach said local industrial and retail properties also showed improvement during the first half, with 13 new shopping centers under construction.

“We’re definitely in the process of a full-blown recovery right now. In all three sectors--office, retail and industrial--the vacancies are dropping, and the markets are tightening,” said George Economos, senior vice president for office properties at Grubb & Ellis. “While we’re seeing moderately heavy construction in retail, we don’t expect new construction in office (space) until the latter part of this decade.”

The improved office vacancy rate, now 17.8%, stems partly from a lack of building activity. Only one building, the 216,000-square-foot State Fund Compensation site in Santa Ana, is under construction.

The vacancy rate, which peaked at 25% in 1988, was 19.6% a year ago.

With fewer offices standing vacant, rental rates have stabilized and in some cases moved higher, according to the Grubb & Ellis report. In prime locations, office space is renting for $1.45 monthly per square foot, up at least 5 cents from a year ago.

The retail market, too, is improving, with the new shopping centers expected to add 3.7 million square feet of space, said John Davidson, a Grubb & Ellis retail broker. A big chunk of that activity is the 800,000-square-foot retail center under construction at Foothill Ranch.

Davidson said plans for most of the new retail centers have some type of entertainment component, including eight new cinema complexes.

“It seems that theaters have replaced department stores as anchors for retail centers,” Davidson said. “People are going to retail centers not just to shop but to be entertained as well.”

Still, new construction is contributing to a rise in retail vacancy rates, which was 6.2% at midyear, compared to 5.3% a year ago.

Industrial space, however, saw a massive drop in its vacancy rate, which fell to 14.5% in the latest survey from 19.6% a year ago. The drop was driven by increased activity by small entrepreneurial tenants and a lack of construction, brokers said.

Fewer Empty Offices

Orange County’s vacancy rate for office space dropped to 17.8% for the second quarter, nearly two percentage points lower than it was in the same period last year: Airport area

1993: 19.4%

1994: 17.0% South

1993: 19.4

1994: 17.0 Central

1993: 18.8

1994: 15.5 North

1993: 20.4

1994: 20.9 West

1993: 19.0

1994: 16.0 Total

1993: 19.6%

1994: 17.8% Source: Grubb & Ellis; Researched by JANICE L. JONES / Los Angeles Times