O.C. in Midst of One of Its Best Office Parties

By MELINDA FULMER

July 3, 1997 12 AM PT

SPECIAL TO THE TIMES

Orange County office vacancy rates dropped to their lowest levels in 16 years, thanks to a flurry of leasing by growing companies and a lack of construction, according to a report released Wednesday.

The overall vacancy rate for Orange County dropped to 10.57% at the end of June from 14.73% a year earlier and is expected to tighten further this year, according to the report released by CB Commercial Real Estate Group Inc.

“Supply is going to be drying up. There is only so much space available in desirable markets,” said Sheri Cameron, CB Commercial’s research director.

The turnaround is a reflection of the booming Orange County economy: Unemployment was down to 3.1% in April, 39,000 new jobs were added last year and, according to a recent UC Irvine survey, most executives plan to do more hiring this year.

Many brokers and developers wouldn’t have predicted such a quick turnaround five years ago during the deep recession when vacancy rates averaged 23.34% and lease rates were discounted up to 40%. Most thought the market was so overbuilt that it would take much longer to recover.

In the John Wayne Airport area, where more than half of Orange County’s total office space is, vacancies dropped to 6.16% at the end of the second quarter from 10.34% last year. Nearly one-third of the area’s space available for lease was taken off the market.

In South County--where many top executives live and have moved their companies--the market was the tightest as the vacancy rate dropped to 5.76% from 9.46%, prompting landlords to raise rents as much as 14%. One developer even plans to construct an office building partly on speculation, something many said wouldn’t happen for years.

“Over the next two to three years [until new buildings are constructed], it’s going to be a landlord’s market all the way,” said George Economos, a senior vice president with Grubb & Ellis in Newport Beach. “You can look for substantial rent increases to continue.”

Already, tenants in many areas have to pay for amenities that landlords used to cover, like new carpeting, paint and parking spaces, which run as high as $65 a month each.

Higher rents have started to push some tenants to less-expensive central Orange County, an area that has struggled in recent years as companies consolidated operations elsewhere. The vacancy rate there fell to 20.38% at the end of June from 25.11% last year.

“People are now searching for more value, so they are starting to migrate back to central Orange County where more space is available and there are better rates,” said Michael Latham, a broker with CB Commercial in Anaheim.

Economos said many companies will likely move office operations or satellite offices to that area.

Torto Wheaton Research, a company affiliated with CB Commercial, predicts that 50% of all office leasing over the next two years will happen in central Orange County.

Meantime, industrial and retail markets also flourished.

Fourteen industrial buildings totaling 521,000 square feet and carrying higher lease rates were built this year, pushing the county’s industrial vacancy rate up to 7.47% from 7% last quarter.

An additional 55 industrial buildings are under construction, many in South County. Analysts expect the construction of more expensive buildings to drive rates up further this year.

In the retail sector, seven centers totaling 1.9 million square feet of space are scheduled to break ground this year. About half the space will go to “power centers” for big warehouse retailers. The rest will be for centers anchored by supermarkets.

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Tighter Market

Orange County’s second-quarter office vacancy rate dropped 4.16 percentage points to 10.57%, the lowest for any quarter since 1981. Second-quarter rates countywide and by region:

Countywide

1996: 14.73%

1997: 10.57

North

1996: 15.24

1997: 11.32

Central

1996: 25.11

1997: 20.38

West

1996: 14.55

1997: 13.64