CALIFORNIA Vacancy Rates, Avg. Lease Rates

CALIFORNIA Vacancy Rates, Avg. Lease Rates

ORANGE COUNTY












The Orange County office market continued to feel the effects of the sluggish economy in the third quarter.






The high-rise market mirrored most business trends: flat though stable. Vacancies increased slightly, up 0.6% in the third quarter to 16%. The limited supply of office space coming on line should lead to a gradual decline in vacancy.






After a sluggish start to the year, landlords were relieved to see net absorption move back into the positive column. Historically the summer months are a period of inactivity. While positive, absorption fell short of expectations,the 97,161 square feet of positive absorption demonstrates small but stable growth. Movement in the market was the result of tenants renewing existing leases or moving from one building to another due to economics.






Cautious tenants resigned their current leases while a number of firms just put off expansion until the economy moves positive. Most tenant activity in the third quarter came from mortgage companies signing and renewing leases across OC.






Current average asking class-A lease rates ranged from a high of $2.26 per square foot in the John Wayne Airport area to a low of $1.86 in Central County, vs. last year’s $2.44 and $1.99, respectively.






Effective rents fell by 5% as a result of more tenant improvements and free rent, while asking rents and contract rent remained stable.






Expectations are for rental rates to remain stagnant to slightly down through the end of the year.






Small-sized deals ranging from 1,000 square feet to 7,000 square feet accounted for about 71% of activity. Although user office buildings for sale were in high demand, limited supply constrains the number of possible deals. Local business owners have been opting to buy properties, taking advantage of record-low interest rates.






As a result, the sale market continued to heat up during the third quarter and will drive sale prices up through the fourth quarter.






Construction slowed substantially due to the overall decrease in demand from large corporations. The amount of office space under construction is 1.1 million square feet, down by 50% from a year ago.






One office project broke ground during the quarter: the second phase of the Arbours office campus in Rancho Santa Margarita will add 62,258 square feet of construction to South County. With less than 100,000 square feet added to the pipeline during the third quarter, vacancies should slightly decline through the end of the year.






The unemployment rate in Orange County was 4% in October, up 0.4% vs. the second quarter. California’s unemployment rate was 6.2% while the nation’s was 5.7% for the period. Office employment increased by 500 jobs countywide.






National retail sales for the quarter slid an unexpected 1.3% from the previous quarter.






Consumer spending and continued record low interest rates will be the key component to economic growth and will keep the market out of another recession, according to Grubb.






Decreasing rental rates, concessions, over supply, hesitant decision-making, and economic ambiguity will persist to make it very challenging for landlords through the end of the year.






The John Wayne Airport area, which had the greatest variance in rates and absorption this year, will begin to see signs of stabilization. Net absorption will be continue to inch up again to small but positive territory.






New construction in the Orange County pipeline is nominal, which should stop the increasing vacancy. Asking lease rates are forecasted to remain flat with effective lease rates decreasing through the end of the year.












Sub: LOS ANGELES






The office leasing market in Los Angeles County took another step toward modest recovery in the third quarter, as tenants took down 320,000 more square feet than was vacated.






And vacancy, at 16.5%, remained unchanged. The improved activity came despite flat employment, suggesting that lower asking rates, as opposed to bigger space needs, is behind the decisions of tenants to pull the trigger on deals.






At $2.45 a foot, average direct asking lease rates for class-A space finished four cents lower than the second quarter.






Despite the modesty of leasing, however, buyers have hurtled themselves at properties in several of the county’s markets, as low interest rates, a weak stock market and the county’s reputation as an attractive market have proven irresistible.






Sales have hit $3 billion this year, surpassing the previous yearly record of $2.6 billion in 1999.






After a spate of large deals earlier in the year, third-quarter leasing activity was driven by small, inconspicuous deals. Except for a 96,000-square-foot renewal by Capital Group Cos. in West Los Angeles, no lease by a private firm exceeded 50,000 square feet.






The small amount of activity has no doubt contributed to the dominant perception that leasing is at a standstill, even as the numbers show otherwise.






Perceptions may soon change, though, as brokers in the South Bay’s El Segundo market report that several major tenants are preparing to sign leases of more than 100,000 square feet each.






More production days and higher employment do not necessarily translate into increased office demand. But they do make such an increase more likely in the future.






Computer services, which was largely blamed for the decline of the county’s office market, has neither significantly increased nor decreased its share of leasing.






Motion picture companies, meanwhile, though they have increased their presence, perhaps because of increases in production days, have not posted major gains. The same can be said of mortgage brokers, who, with a vital housing market, have signed on for more space but who are hardly of a number to affect market dynamics.






Only the legal profession appears to have picked up its demand for space. But even here, appearances are deceiving, as the large leases for space among attorneys have resulted from downsizing as often as they have resulted from new demand.






Though several markets have surpassed sales records this year, downtown is gearing up for a sell off of historic proportions.






Since April alone, five major skyscrapers,BP Plaza, Library Tower, Ernst