Vacancies Are Up in South O.C. Offices
With an abundance of low-rise buildings in campus settings, south Orange County symbolized the Southland’s booming office market of recent years. Now it is leading the region’s commercial real estate slowdown.
The vacancy rate for the area, which stretches from Irvine to San Clemente, has nearly doubled in the last year--to 19.2% in the current quarter. That’s tops among major markets in Southern California, even higher than downtown Los Angeles, according to estimates by CB Richard Ellis Services Inc., which tracks real estate trends.
While the office rental market has been cooling nationally as the economy has weakened, the dramatic change in south Orange County reflects the pullback of businesses, especially tech firms, in an area that has been rapidly adding new offices.
Most of the buildings in south Orange County have gone up in the last 15 years, as the area has developed into a major residential and commercial center. With about 17 million square feet of commercial space, south Orange County’s office market is roughly the size of the San Fernando Valley’s, less Burbank and Glendale.
But in recent months, technology companies--including Gateway Inc., Buy.com Inc., FutureLink Corp., Ethentica Inc. and FreeRealTime.com--have emptied out of about half a million square feet of offices in south Orange County, dumping sublease space into the market. The available sublease space alone added almost 3 percentage points to south Orange County’s latest vacancy rate, said Steve Case, senior managing director at CB Richard Ellis in Anaheim.
One of the subleases is a 2-year-old building in Lake Forest, which was occupied briefly by Open Bid Exchange, an Internet start-up. The company cleared out of the 26,000-square-foot offices in January, but brokers have been unsuccessful in subleasing it.
Not that long ago, “the building could have been leased a couple of times over by now,” said Scott Garmon, a broker at Cushman & Wakefield California Inc., whose firm just took over the leasing effort. “You have a smaller pool of potential companies to pull from.”
That is apparent in the way building owners and managers are moving to lock in new tenants. Recently, Irvine Co., Orange County’s largest landowner and a bellwether for the commercial market, slashed rents as much as 20% for some offices. Other landlords are expected to follow.
Landlords in south Orange County and elsewhere also are offering move-in incentives, some that have not been seen in quite a while, such as a free month’s rent, paying for office improvements and an agreement to make smaller annual rent increases.
A year ago, leasing manager Michelle Wilkirson was charging dot-coms and other businesses as much as $8 a square foot for a fully equipped office in the Airport Executive Suites in Irvine. The building was essentially full.
But occupancy slipped to 70% early this year, prompting Wilkirson to slash prices by more than half to about $3.50 a square foot. Moreover, she began offering a free month’s rent on a 12-month lease. The result: Occupancy is back up to 85% to 90%.
“Last year they said, ‘Here’s the money’ and wrote a check. It didn’t matter how much it cost,” Wilkirson said. “Today, they’re more price-conscious and being more cautious.”
Despite the rapid slowdown, some analysts think that the office market won’t get much worse in south Orange County--unless the job market deteriorates. And there are some positive signs. The net occupied space in all of Orange County was negative 750,000 square feet in the first quarter, but it improved to minus 295,000 square feet in the current quarter. Orange County as a whole also will be adding about 25% less new office space this year compared with 2000, helping to constrain the buildup of excess supply.
Even so, Orange County is expected to put up 3 million square feet of offices this year, and a good chunk of that will be in the southern part. That compares with projected construction of 3.7 million square feet of offices in Los Angeles County this year.
In the short term, with businesses continuing to trim back, the supply of sublease offices on the market probably will go up as rents continue to go down. Typically, sublease spaces are rented at discounts of 10% to 15%.
Kevin Hayes, an Irvine-based regional president at Staubach Co., a real estate services firm headquartered in Dallas, said the last few months have added hundreds of sublease offices in Orange County, especially smaller ones.
“It’s not unusual for as many as 40% of a customer’s alternatives to be subleased space,” Hayes said. “The net effect of that clearly will have downward pressure on rental rates, and we see that continuing through the rest of the year.”
He added, “No landlord is immune to it.”
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Rising Vacancies
The amount of unoccupied office space in Orange County and in south Orange County by quarters.
*
Orange County
8.8%
13.1%*
*
South Orange County
4.5%
19.2%*
Source: CB Richard Ellis Services
