Broker Sees Slower Demand for O.C. Office Space

After a remarkable two-year recovery, demand for offices will grow at a slower pace this year as a flood of new space comes on the market, one of the largest commercial brokerages in Orange County predicted Wednesday.

About 1.5 million square feet of office space will be added this year, roughly six buildings the size of Taco Bell’s headquarters in Irvine, and double the amount that became available in 1998.

As a result, it could take longer to absorb that space, causing vacancy rates to increase by the fourth quarter when some new buildings are expected to be completed, according to Grubb & Ellis’ 1999 real estate forecast.

The bellwether gauge will be how long it takes two new projects--the eight-story Koll Center Irvine North and the 12-story Opus Center Irvine--to fill space.

Built without tenants signed in advance, the sooner those projects attract corporate interest, the quicker other proposed buildings could start going up. At least seven nearby projects totaling 1.5 million square feet are on the drawing board, the report said.

“The other developers in the market will pay close attention,” said Christopher McDougall, who heads Grubb & Ellis’ research department in Orange County. Another 9.2 million square feet of office space was planned or proposed in Orange County overall at the end of 1998, he said. “Before they pull the trigger on a new development, they’ll see if there is sufficient demand in the market,” he added.

On Tuesday, Koll Development Co. said its first tenant has been signed to its building, which is under construction. California Bank & Trust agreed to lease the first two floors, or roughly 20%, of Koll Center North over the next decade, the developer said.

Office vacancy rates in Orange County fell last year to the lowest level since Grubb & Ellis began tracking the market 15 years ago. Those rates are expected to remain steady through the first three quarters of the year, but will rise slightly beyond the 7% to 8% projection by the fourth quarter as some tenants, such as Fluor-Daniel move to new offices in South County, and others vacate the market.

They’ll leave behind large blocks of space, giving potential suitors, such as temporary employment services, telecommunications firms and service-related companies, who are expected to have the biggest need for office space, more options to ponder, especially if lease rates follow projections.

Through the third quarter of 1998, some lease rates moved up by more than 30%, and were strong throughout the county during the first half of the year. But in the fourth quarter, as new buildings became available, rates rose only 2% to 5%, ending the year at $2.23 per square foot, the report said.

With more space available, lease rates are projected to increase by only 5% this year, the report said.

“The reason we won’t see large rate increases is because of the new product coming on line,” said Gary Wescombe, partner at E&Y; Kenneth Leventhal Real Estate Group in Newport Beach. “I think their forecast portrays the market accurately.”

While the airport area continues to expand, the report noted that Central County, around Anaheim, could be among the biggest gainers this year. Rental rates are projected to rise at least 10% over the next 12 months, the report said. South County also should see vacancy rates below 5%, as new construction continues in Aliso Viejo, the Irvine Spectrum and Foothill Ranch.

In other markets, industrial and research and development construction was at its highest level in a decade, but the pace also will slow down this year. High-tech companies are expected to provide steady growth.

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Vacancy Rates

Orange County’s office-space market will remain scant during the next two years. Office vacancy rates:

1993: 17.2%

1994: 15.2%

1995: 15.9%

1996: 13.7%

1997: 10.2%

1998: 8.3%

1999: 8.5*%

2000: 8.7*%

* Projected

Source: Grubb & Ellis