ORANGE COUNTY-Absorption continued for the third straight quarter in the county’s office market, although demand remained weak and rental rates continued to decline. Newly issued reports from Colliers International (289,800 square feet), CB Richard Ellis (690,000 square feet) and Voit Real Estate Services (376,906 square feet) all showed positive absorption, marking at least the third straight quarter of positive absorption reported by all three.

The improvement in the county’s office market is part of overall progress in the US office market, which recorded its fourth consecutive quarter of occupancy gains with 4.5 million square feet of space absorbed in the first quarter, according to a new report from Jones Lang LaSalle. The report, which tracks 43 markets around the country, noted that occupancy increased in both downtown and suburban markets in the first quarter.

Despite the general improvement in Orange County’s market, the Voit, Colliers and CBRE reports also showed the average asking lease rate slipping by pennies since the fourth quarter of last year. Voit and CBRE both pegged the first-quarter rate at $1.96, and Colliers figured it at $1.97. Although the lease rate has been slowly sinking since its peak of $2.77 in 2008, Voit’s Jerry Holdner, vice president of market research, tells GlobeSt.com that it’s falling more slowly now. “I can even see some lease rate growth at the end of the year,” said Holdner, who noted that others who follow the Orange County office market also are suggesting that rents could tick up a bit at the end of the year.

Holdner explained that the possibility of rents rising has to do with the big slowdown in the rate at which new space is being added to the available inventory, along with absorption and the lack of new construction. “This should eventually chip away at the vacancy,” Holdner said.

Voit’s report shows the total of vacant space, both direct and sublease, at 16.92% in the first quarter, a decrease from 2010's fourth quarter rate of 17.3%, while the total of available space (direct and sublease space being marketed) was at 20.82% and was down from the previous quarter's rate of 21.32%. Colliers said the total of direct and sublease space declined 50 basis points to 21.5%, and CBRE listed it as 22.2%. Voit tracks an inventory of 110 million square feet of Orange County office space in 1,500 buildings, CBRE shows an inventory of 100 million square feet in more than 1,800 buildings, and Colliers tracks roughly 80 million square feet in 1,000 buildings.

Despite the pickup in demand demonstrated by the net absorption, Holdner noted that demand remains weak by historical standards. Nonetheless, tenants signed a number of large leases during the quarter, including six deals that totaled 456,000 in aggregate, a sign that some larger leases are being negotiated these days, Holdner said.

Colliers’ report pointed out that, “While many recent quarters were flooded with investment sales of class A office properties, this quarter was dominated by several large lease deals.” The majority of the leases were signed for buildings located in the Airport submarket, according to Colliers, which observed: “The increase in large lease activity is a positive sign for an office market that endured such a high number of large space givebacks over the last four years.” Another top newsworthy item, Colliers added, was the Irvine Co. agreeing to build a 380,000-square-foot office tower at 650 Newport Center Dr. in Newport Beach to be used by Pimco as its new headquarters.

One of the differences in leasing that is accounting for absorption is the movement of new companies into the market, as SVP Dean Chandler in the Newport Beach office of CBRE pointed out in discussing a five-year lease for 21,397 square feet that Florida-based Ultimate Software signed at Griffin Towers at the 55 Freeway and MacArthur Boulevard. “While we have seen growing activity in the office market recently, most of that has resulted from relocations from within the county, so to see new tenants coming into the market is very encouraging for the local economy and for local employment,” Chandler said. He and CBRE’s Justin Hill represented the landlord, Lincoln Property Co., with Karen Munroe and Kevin McNeil with Lincoln’s brokerage arm representing Ultimate Software.

As Chandler’s comments suggest, employment remains a big concern in Orange County, as in the rest of the nation, in terms not just of the overall economy but because of the close correlation between jobs and the office market. Colliers’ quarterly report describes the job market as fluctuating and calls it “the highest hurdle the office market recovery has encountered,” saying that it’s one reason the county’s office recovery will be slow.

Voit also foresees a slow recovery, and Holdner points out that one of the unknowns is the amount of shadow inventory—space that tenants are leasing but not using—that needs to be filled before taking new space. Holdner’s forecast says that lease rates are expected to remain soft for the near future, and concessions in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances should continue for now as landlords continue to compete for much-needed tenants.