Commercial Market May Be Cooling Off

After two strong years, the Orange County office market is showing signs of cooling off, a pair of recent reports showed.

The commercial office market has failed to absorb more than 235,000 square feet of space vacated, in part, by two large tenants. Most of Unocal Corp.’s 76 Products Co. subsidiary moved from Costa Mesa to Phoenix after being acquired by oil refinery and convenience store operator Tosco Corp., and the Federal Deposit Insurance Corp. consolidated its Irvine office into its operations in Dallas.

As a result, the vacancy rate edged up to 9.3% in the first quarter from 8.7% a year ago, according to the quarterly report from Grubb & Ellis Inc., a Newport Beach based commercial brokerage.

There’s more than 2.6 million square feet of prime office space under construction, primarily in the airport area and in South County, and some observers believe Orange County could be approaching saturation because preleasing activity has been slow. But Grubb & Ellis said there’s no reason to panic.

Tenants simply will gain some leverage to bargain for more favorable leases, said Grubb & Ellis’ research director, Jerry Holdner. He expects lease rates to stabilize in the coming months. And in an effort to fill space, landlords may be more inclined to help pay for improvements that ordinarily would be shouldered by new tenants, Grubb & Ellis said.

Still, the reports concluded that market conditions remain strong. Average lease rates topped $2 per square foot for the first time ever, Grubb & Ellis said. Moreover, office space in Newport Beach was leasing for $3.67 per square foot, still the highest rate in the Southland, said Delta Associates, a Los Angeles-based commercial real estate firm that prepared the other report.