IRVINE, CA-It's no secret that office recovery in Orange County has been slow, albeit steady, but without the overbuilding that occurred in 2007 and 2008, where would the market be today? Jones Lang LaSalle reports that vacancy in the class-A Orange County market is at 16.1%, but predicts that it would be as low as 9.8% today without the inventory that came online during those years—not much higher than the 8.3% vacancy the sector saw at the market's peak in 2006.

Despite recording substantial positive absorption since 2010, recovery is still sluggish, and JLL maintains that the biggest hindrance to approaching single-digit vacancy rates is the overbuilding that occurred during those years, bringing more than 3 million square feet of new product to the market at the same time many companies were shedding employees and space. If that boom of product had never taken place and the market underwent a more natural recovery, the market could potentially be carrying a vacancy rate in the single digits right now, the firm reports.

So what preceded the boom? According to Jeff Ingham, senior managing director of JLL, the housing and mortgage bubble is much to blame, particularly since so many mortgage companies had office space in Orange County and expected to continue growing with housing demand. When that bubble burst, many of these firms either disappeared or cut back their space demands, leaving a wealth of unabsorbed space to plague the market.

“We had something like 15 million to 20 million square feet of mortgage-company tenants,” Ingham tells GlobeSt.com. “Ameriquest alone was 2 million square feet of that, and they completely evaporated.”

Much of the new construction that occurred post-2006 in the county was driven by this mortgage-related demand, “and the mortgage demand put pressure on the market across the board,” says Ingham. “Central County really got hit hard by the mortgage pullout—every major high-rise had a mortgage component in it. As that bubble burst in '07 and '08, the market really fell on its ear, and that was on top of the fact that we had new buildings that were built at that point in time. If we didn't build all those buildings, where would we be?”

In hindsight, had the industry been more aware of the bursting bubble, much of that construction would have been halted. “It's fair to say that no one foresaw that the housing market would burst,” says Ingham. “Everyone made the decision to buy houses and prices went up.”

Despite the slow recovery, Ingham does see things moving in the right direction for the office market. “We do see a light at the end of the tunnel. We're seeing a lot of recovery and expansion, and migration from outside the market—especially technology oriented tenants, financial-related but non-mortgage, manufacturing and life-science groups. We're seeing job growth in those facets.”

The one caveat to this growth, of course is increasing interest rates, which has caused demand to drop in the market. “We had a lot of mortgage companies that were expanding significantly over the last two to three years, primarily by refis,” says Ingham. “All of our mortgage clients have taken their foot off the pedal and pulled back on their expansion plans. We haven't seen anyone give back space, but they have not been on a hiring frenzy either.”

The concern is that homeowners aren't going to be refinancing at some point as interest rates head into the 4% to 5% range, so mortgage business will be based on new-mortgage demand and new-home purchases, of which there will be significantly fewer than refis, “which has a pretty dramatic impact on our office market,” Ingham concludes.