Office Landlords Slash Rents, Vacancy Rises

A flurry of large lease deals wasn’t enough to stem the tide for Orange County’s office landlords, who saw rents fall and overall leasing remain slow in the fourth quarter, while empty space continued to climb.

The average monthly asking rate for the county’s office market, which totals about 108 million square feet, was $2.47 per square foot at the end of 2008, according to the Irvine office of Voit Commercial Brokerage LP.

That’s down nearly 11% from a year earlier. Rents fell 14 cents, or about 5.3%, in the fourth quarter alone as landlords moved beyond offering steep tenant improvement concessions and began slashing rents.

Last quarter was the steepest drop in quarterly rents OC’s seen in more than a decade.

“That’s the biggest thing that stands out” in the fourth quarter office market data, said Jerry Holdner, vice president of market research for Voit.

What a difference a year makes: The $2.77 per square foot average rent seen at the end of 2007 was a record high for the county, according to Holdner.

Now, tenants are signing deals at rates comparable to those seen in mid-2006,or lower, factoring in concessions.

“The next six months is a great time for a tenant to negotiate a long-term lease,” Holdner said.

Voit’s year-end figures show OC ending 2008 with a vacancy rate of 15.2%. That’s an increase of 24% from the vacancy levels of a year ago, and nearly double rates seen here two years ago,prior to the implosion of the mortgage industry and completion of several office towers.

On the upside, vacancy rates at the end of 2008 were only up about 2% from the end of the third quarter, according to Voit’s data. The brokerage tracks office buildings larger than 25,000 square feet; other researchers put the area’s vacancy rates closer to 16% or 17%.

Don’t expect a turnaround until mid-2009 at the earliest, said Holdner, who predicts vacancy rates will rise at least another point during that time.

The heads of other local brokerages, such as Santa Ana-based Grubb