Office Occupancy, Rents Set Record as Firms Expand
Strong job growth in Orange County propelled companies to lease larger quarters and, in turn, pushed the office vacancy rate to an all-time low of 8.2% countywide, according to an industry report released Monday.
The rate dropped to its lowest level since records were first kept in 1988--even though a spate of new buildings opened to handle some of the demand, according to the report by commercial brokerage Grubb & Ellis Inc. in Newport Beach.
Lease rates, meantime, rose to a record $2.10 a square foot during the period, rising 7 cents above a year ago. And the amount of office space leased during the period rose to 1.2 million square feet, a decade high.
“The numbers paint an unbelievably vibrant picture,” said Craig Jones, a Grubb & Ellis analyst who completed the report. “The market went well above our expectations for the year already, and there’s no sign of it slowing down.”
The glowing survey results caused Jones to raise his market projections. He expects rents to surge 8% on an annual basis to $2.16 a square foot for prime office space, while low-rise buildings will grow even more, up to 13% to $1.59 a square foot.
The demand for office quarters, experts say, is strong enough to absorb 1.5 million square feet of space in 11 buildings now under construction without creating a shortage.
“I’ve been in real estate about 20 years, but I don’t think we’ve ever seen such an equilibrium of supply and demand,” said Jack McNutt, a Grubb & Ellis broker. “It seems like we’re in a period that’s very balanced.”
The vacancy rate for low-rise buildings that can be used for offices or industrial uses is not part of the main Grubb & Ellis rate. However, the so-called flex-tech buildings, going up mainly in south Orange County, are becoming an increasingly important force in the office market. The vacancy rate for such buildings was 16%, the brokerage said.
In the late 1980s, developers overbuilt the office market, and as the recession set in soon after, lenders predicted that it would take a decade to fill the largely vacant towers.
Now, with those buildings mostly filled and rents rising, more and more companies are relocating to less expensive areas. Aliso Viejo, for instance, has drawn engineering giant Fluor Corp., chip maker QLogic Corp. and online retailer Buy.com Inc.
Most of the county’s growth in the second quarter was in the John Wayne Airport area, which contains the county’s largest cluster of office space, and in South County, where most low-rise office space exists. About 90% of space filled countywide came in those areas, the survey showed.
A little more than half of the companies looking for more space are high-technology firms, which need large amounts of new space quickly, McNutt said.
For instance, Sound Advantage, an Irvine communications company, nearly quintupled its space when it moved from a 5,000-square-foot office to one with 23,000 square feet. Winfire, a software company, moved into 50,000 square feet of space in Irvine from an office with 15,000 square feet.
ConAgra in Irvine and BMC Software in Costa Mesa also filled large voids in the market during the quarter.
Tenants signed up quickly for new buildings, such as LNR Newport Plaza in Newport Beach, which contains about 130,000 square feet, and later phases of Lakeshore Tower in Irvine, with nearly 400,000 square feet. Those buildings were almost fully occupied by their opening.
“We’re seeing buildings getting leased fairly quickly,” said Steve Layton of Layton-Belling & Associates, a Newport Beach investor and manager of commercial properties.
Layton said most of the growth comes from tenants outgrowing their space, and in coming months, he expects to see vacancy rates countywide dip even lower.
“There’s a ton of tenants out there,” said Jeffrey Bitetti, who heads marketing at Nexus Corp., which is developing twin towers near John Wayne Airport.
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Cramped Quarters
Orange County’s office vacancy rate hit an all-time low of 8.2%, sending office rents to an all-time high. The percentage of office space leased, by industry, during second quarter:
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Internet-related firms 40% Financial/CPA’s 20 Law firms 10 Other 10 Health Care 5 Insurance 5 Communications 5 Mortgage or Loan Funding 5
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Source: Grubb & Ellis Inc., Newport Beach
