The office market in Orange County held up in the secondquarter. According to a new report from JLL, thelocal office vacancy rate remained flat at 13.9% and asking rentsremained flat at $3.11 per square foot. Absorption rates alsoremained flat but negative at -381,042 square feet. The marketperformance was better than most expected, but also a sign that theworst could still be yet to come.

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"The market doesn't react very fast," JeffIngham, senior managing director at JLL, tellsGlobeSt.com. "There was some negative net absorption and rentalrates remained flat, but it wasn't crazy negative. It wasn't nearlyas bad as it was in 2008. That doesn't mean that it isn't going tochange in the future, but the reality is that it is too early totell. We are in the first inning of this, and it is still too earlyto know where it is going to go."

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Looking at rents, Ingham said the market typically needs to seea change in tenant behavior and activity before a change in rentalrates, and that takes times. "Rental rates are still pretty flat,but to see a rental rate change, the market needs to test theavailability and tenant requirements," he says. "It needs to becompetitive for rental rates to really drop. Rental rates are basedon asking prices, and there is quite a bit of new construction. Newconstruction is going to be at a higher price. As things shape up,the market will act and react based on the competition anddemand."

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In addition, the negative net absorption—especially paired witha flat vacancy rate—is more than likely attributable to stalledmove-ins rather than a change in leasing activity. "Negative netabsorption is being exacerbated by the way that we trackabsorption, which is based on when tenants occupy space," saysIngham. "We have had tenants moving out of space, but new tenantsthat we going to occupy a new space haven't moved in yet. So, thereis a lag that has occurred where tenants have signed new leases butthey haven't taken occupancy either because there has been a lag inconstruction or because everyone is working from home so thereisn't a rush to move in."

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On significant change was the increase in sub lease space. TheOrange County market has seen a significant increase in newsublease space, mostly in the Airport Area and South Countysubmarkets. This is almost entirely due to tech companies placingspace on the market. "We have had more than 300,000 square feet ofsublease space come back to the market since March. 80% of that istechnology space," says Ingham. "Stock market growth is reallybeing fueled by growing technology companies, and the technologycompanies that we are working with are not as worried about theeconomy as other companies."

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The increase in sublease space could ultimately increasecompetition among landlords and serve to drive down rates, but likeIngham said, it is still too early to tell.

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.