Vacancy is rising and rents are falling in Orange County’s office market. To maintain occupancy, landlords are lowering their rent rates and reducing lease terms.
The total amount of office space available in Orange County was 22.41 percent at the end of first quarter 2009, which is an increase of 3.72 percent from the vacancy rate at the end of first quarter 2008. Many tenants are either downsizing or consolidating due to the declining economy and shrinking job market.
However, as demand drops off and lease rates decline, some companies are capitalizing on some of the opportunities arising in Orange County’s office market. Orange County’s popularity with businesses and its strong labor base has always made it a popular destination for companies to expand into, but its high rent rates prevented many from doing so. In the current economic climate, businesses such as loan modification companies and call centers have actually expanded and are moving to the area. Now that rents have fallen, these companies that would previously have been uninterested in office space within Orange County due to its high prices are opting to move to the area.
While there are some great opportunities for tenants in the current market, the same cannot be said for buyers. The combination of buyers’ inability to obtain financing, coupled with the unrealistic pricing set by sellers, has frozen sales activity. While some sales are occurring, either because exchange buyers need to purchase property quickly or through unique financing for owner/user buyers, there are very few transactions closing. However, as more office product begins to foreclose over the course of the next 12 months and is returned to lenders, there will be a resurgence of sales activity as sellers will eventually lower their pricing in the wake of increased competition.
Development has also halted due to the fact that most of the product that was completed within the last 2 to 5 years remains vacant. The only significant office development to be completed in 2009 is the 30,000 square-foot property located at 1401 Dove St. in Newport Beach.
— Chris Deason is a senior vice president in the Irvine, California, office of Voit Commercial Brokerage, a member of CORFAC International.