Office Vacancy Rate Hits 16.9%
Orange County’s office vacancy rate surged in the third quarter to the highest level in five years, pushed up by slowing demand and an abundance of new construction in the overbuilt South County market.
The increase in the county’s unoccupied office space, to 16.9% from 14.9% in the second quarter, may have included effects from the Sept. 11 terrorist attacks, said officials at Cushman & Wakefield Inc., the brokerage that issued the report Tuesday. But they said the fallout from the attacks will probably be more pronounced in the months ahead, adding possibly two percentage points to the vacancy rate in the fourth quarter.
Orange County’s rising vacancies stood in contrast to improvements in downtown Los Angeles, which has had little new construction. With steady demand for space there, its vacancy rate fell to 15.8% in the third quarter, from 17% in the previous quarter. That was the lowest in more than a decade, and it helped drive down the vacancy rate for Los Angeles County as a whole to 13.4% from 14.5%, according to Cushman & Wakefield.
“I have never seen the [downtown Los Angeles] market as fundamentally strong as it is now,” said John Eichler, director of real estate services for Cushman & Wakefield’s Los Angeles office. “Small and major tenants have continued to grow despite the overall [weak] economic environment.”
Whether downtown Los Angeles will keep posting significant gains is in doubt given the weakening economy and the increased uncertainties about the future.
Elsewhere in the Southland, vacancies rose sharply in the Westside of Los Angeles, where there has been strong new construction. A separate report by Grubb & Ellis showed vacancies surging in San Francisco as well.
But the biggest jump in vacancies among major markets in the Los Angeles-Orange County area was in south Orange County.
The amount of vacant office space from the Irvine Spectrum south to San Clemente rose to 30.6% in the third quarter, up from about 24.3% in the second quarter. The rate was up almost 20 percentage points from a year earlier, according to Cushman & Wakefield.
During the late 1990s, South County was one of the hottest commercial real estate markets, favored by new-economy companies and start-ups. Even last year, there was plenty of leasing activity. But the tech meltdown this year left more offices empty and spurred an increase in subleasing.
Developers, meanwhile, pushed ahead to complete projects. This year more than 1 million square feet of new office space has been built in South County, said Mike Talafus, a market research analyst at Cushman & Wakefield in Irvine. An additional 200,000 square feet is in various stages of completion, he said.
“I would describe it as overbuilt,” he said.
Those conditions have lowered leasing rates. In South County, the average lease rate per square foot in the third quarter was $2.33, down about 6% from a year earlier.
For all of Orange County, the average rate per square foot was $2.22 in the third quarter, essentially unchanged from the second quarter but down about 15% from the third quarter of last year.
Steve Case, a senior managing director at CB Richard Ellis, said he expects the market to remain sluggish until possibly mid-2002. He said some potential tenants are delaying expansion until they can determine the effects of the slowing economy on their business. Other firms are waiting to see if they can secure a better deal from landlords if market conditions worsen.
Cushman & Wakefield’s quarterly report for Orange County was based on occupancy at 785 buildings of 25,000 square feet or more, excluding government or owner-occupied structures.
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Staff writer Jesus Sanchez contributed to this report.
