Office Market Holds Despite Subprime Woes

Jerry Holdner, vice president and chief of research at Voit, tells GlobeSt.com that the office market, although it has slowed from its breakneck pace of recent years, is showing remarkable resilience. Holdner points out that the average asking full service gross lease rate rose to $2.76 per sf per month in the second quarter, up from $2.47 in the same quarter last year, despite the vacated subprime space and an ambitious office building program by developers. CBRE pegs the rate at $2.73, up seven cents from the first quarter.

Tenants from a broad spectrum of industries are stepping in to fill much of the space that is being vacated by mortgage-related companies, but Orange County did record a relatively rare instance of negative absorption--184,554 sf--in the second quarter. Holdner notes, however, that the county has absorbed more than 533,000 sf of office space during the first two quarters.

The CBRE report comments that, "Although the Orange County office market has endured a continuation of the shrinking mortgage industry, it seems to be weathering this subprime storm." The CBRE report adds that "demand from expanding and start-up tenants has off-set recent give-back" space" from the mortgage-related tenants.

The latest average asking rental rate increase marks the 14th consecutive quarter in which the county's average asking lease rate has climbed. One reason for the increase, according to Holdner, is that new space coming onto the market is generally priced higher than existing space. Also, demand for the space remains strong as almost half of it is either preleased or build-to-suit.

During the first half of this year, the county added nearly 1.9 million sf of new space, most of it in the John Wayne Airport and South County submarkets. Even with the increased development, class A rates are highest in the airport area at $3.17 per sf per month.

Holdner tells GlobeSt.com that he expects lease rates to continue to increase at moderate levels, and concessions should begin to increase in the short run in the form of limited free rent, as new inventory becomes available from construction deliveries. He anticipates annual lease rate growth of at least 7% to 10% continuing in 2007.