Here’s a preview of Voit Commercial Brokerage’s 2nd Quarter 2009 Commercial Real Estate Market Report, soon to be released together with the latest reports for Office, Industrial, Flex, R&D and Retail for the Orange County, San Diego County and Las Vegas markets.
• Market Challenges – The Orange County Office market is facing challenges due to the national recession. The three primary concerns are as follows: expensive and scarce financing, economic uncertainty and volatility, and the gap between “ask” and “bid” pricing between buyers and sellers. However, that gap appears to be diminishing, which is evident from some recent large sales that occurred in the last month of the second quarter. Another challenge the office market is facing is a lack of tenant demand. The slow economic environment is causing tenant contractions and failures, which are putting upward pressure on vacancy and availability rates. This has lead to many tenants requesting lease rate relief from landlords, and owners attempting to renegotiate loan terms with lenders.
• Construction – During the first half of 2009, Orange County has added a total of 171,863 square feet. Over the past three and a half years, over seven million square feet of new construction has been completed in Orange County. The record year for new development was 1988, when 5.7 million square feet of new space was added, and vacancy rates were approximately 24%. Total space under construction checked in at 166,059 square feet at the end of the second quarter, which is almost half the amount that was under construction this same time last year. The slowdown in construction has and will ease the upward pressure on vacancy going forward.
• Vacancy – Direct/sublease space (unoccupied) finished the quarter at 16.39%, constituting an increase over last year’s second quarter rate of 14.45%. This 16.39% rate is less than the 17.28% vacancy rate in the first quarter of 2002, which was the last time a large amount of new construction was added to the market.
• Availability – Direct/sublease space being marketed was 22.50% this quarter, up from the 19.76% we saw this same quarter last year. This is an increase of 13.87% of new space being marketed when compared to the same quarter last year. We are finally starting to see a slowdown in the velocity of new available space being added to the market.
• Lease Rates – The average asking Full Service Gross (FSG) lease rate per month per foot in Orange County is currently $2.29, which is a 15% decrease over last year’s rate of $2.69 and eight cents lower than last quarter’s rate. The record high rate of $2.77 was established in the fourth quarter of 2008. Class A rates for the county are averaging $2.47 FSG and are the highest in the Airport market, where class A rates are averaging $2.65 FSG.
• Absorption – Net absorption for the county posted a negative 672,880 square feet for the second quarter of 2009, giving the office market a total of 1.5 million square feet of negative absorption for the year. This negative absorption can be attributed to the recent job losses.
• Transaction Activity – Leasing activity checked in this quarter at 1.95 million square feet. The average amount of leasing per quarter over the past nine quarters was 1.98 million square feet. Sales activity showed a significant increase over last quarter, posting 1.57 million square feet of activity compared to the first quarter’s 200,000 square feet. • Unemployment – The unemployment rate in Orange County was 8.6% in May 2009, up from a revised 8.4% in April 2009, and above the year ago estimate of 4.7%. This compares with an unadjusted unemployment rate of 11.2% for California and 9.1% for the nation during the same period.
• Employment – According to the State of California Employment Development Department, Orange County lost 71,100 payroll jobs over the last twelve months – 19,200 in retail trade, transportation and utilities services, 13,100 in construction & 12,700 in professional and business services. However, between April 2009 and May 2009 Orange County gained 300 jobs.
• Overall – The office market has not reached the bottom nor has it begun to improve, but we are starting to see a slowdown in the amount of available space being added per quarter as well as an increase in sales activity. Lease rates are expected to remain soft for the short run, and concessions should continue to increase in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances to incentivize tenants to act now. We should see an increase in activity in the second half of 2009 from pent up demand, once financial markets correct themselves and as consumer confidence increases. The final outcome hinges on how the recession progresses and how quickly credit eases up. Click HERE to view Voit’s latest Commercial Real Estate Market Reports.
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