Third-quarter statistics from Voit Commercial Brokerage showedthe county's office market posting 361,184 sf of negative netabsorption in the third quarter, while CB Richard Ellis reportednegative net of 392,000 sf. Voit lists the direct vacancy rate at14.85%, including both direct and sublease space that's empty,compared with last year's third-quarter rate of 10.53%; CBREcalculates the vacancy rate at 15.4%.

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The two firms come in very close on the overall availability ofspace, too. Voit pegs it at 20.95% for the third quarter, up from15.11% in the third quarter of last year, while CBRE figures it at20.6%. The figures vary slightly because the two firms trackdifferent inventories, with Voit listing nearly 108 million sf ofoffice space in the county and CBRE tracking about 100 millionsf.

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Despite the minor differences in their statistics, the quarterlysurveys by the two firms show the same general trends and cite thesame factors for the weak performance in what was once one of thebest-performing office markets in the country. "The negativeabsorption can be attributed to the credit crunch and financecompanies consolidating," says the Voit report, authored by JerryHoldner, vice president of market research.

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At CBRE, managing director Jeff Osborn of the company's Anaheimoffice and leader of its Southern California Office SpecialtyPractice comments that, "There's no question real estate decisionmakers associated with larger tenants and institutions areoperating conservatively and demonstrating a concerned outlook. Atthe same time, in the third quarter we saw local businessescontinuing to move forward in signing new leases and investing insmall buildings and condos." Osborn notes that although leasingactivity continued in the third quarter, office deals wereapproximately 30% smaller, according to CBRE transaction data.

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CBRE also points out that the amount of sublease space on themarket in the office sector increased in the third quarter byapproximately 6%. "While some of this can be attributed to thecontinuation of mortgage company attrition in the market, thesublease statistics also indicate that as local companiescautiously move forward with operating their businesses, they aredoing so with less people, causing office tenants to downsizeand/or relocate to smaller quarters and put a portion of theirspace on the market for sublease," the CBRE report states.

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Holdner tells GlobeSt.com that rising sublease space is one ofthe factors that is driving down asking rents, which declined to$2.61 in the third quarter, down from $2.77 at this time last year.However, Holdner says that the overall amount of space on themarket, including both direct and sublease space and newconstruction, is a bigger factor than sublease space alone. "Thereis just a lot of space on the market competing for the sametenants," Holdner says.

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At the same time, Holdner points out that construction isslowing. The amount of new space under construction totaled 292,139sf at the end of the third quarter, which is almost 90% lower thanthe amount that was under construction at this time last year. Voitestimates that a total of 1.7 million sf of new construction willbe completed this year, most of which has already been delivered."This will put less upward pressure on the recent rise in thevacancy rate," Holdner's report says.

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Colliers International's report on the county's office marketpresents a similar view of the situation. "Although the OrangeCounty office market has been one of the first areas in the GreaterLos Angeles Basin to feel the effects of the economicslowdown—primarily due to its heavy concentration of realestate-related firms—this does not necessarily mean that the marketis closer to the bottom" the Colliers report states. With officevacancies continuing to rise and average asking rental ratesdeclining, Colliers says, "It appears thatthe Orange County officemarket is in the midst of a prolonged downturn expected to lastthrough the remainder of 2008 and well into 2009." Colliersobserves that Orange County today "is a far cry from just a coupleof years ago when the Orange County economy in general and the realestate market in particular were among the strongest in thenation."

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Voit's figures show that gross activity for the thirdquarter—the total of all leases and sales—was lower than lastquarter at just over 2.1 million sf. That compares to an averagequarterly gross activity level in 2007 of 3.2 million sf and anaverage of 2.8 million sf per quarter in 2006. "The recent lack ofactivity can be tied to the credit crunch as well, which means wecould see an increase in activity in 2009 from pent-up demand oncefinancial markets correct themselves," the Voit reportconcludes.

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