Diverging Market Conditions Emerge in Region

The Orange County office market "continues to be impacted by the collapsed credit markets, a struggling home-building industry, and the nation's economic slowdown," the report says. In contrast, Los Angeles County "continues to maintain one of the lowest office vacancy rates in the nation at year-end 2008, although the rate has risen steadily since the end of 2007," the report says. Of course, no office market in the US is exempt from the effects of the recession, so as a result LA County is shedding jobs, "causing demand for office space to wane and rental rate growth to stall," the Delta Associates survey shows.

Orange County has also suffered the most in terms of job losses, according to the report, which shows that the Los Angeles Basin—including Los Angeles, Orange County and the Inland Empire—lost 72,900 payroll jobs over the 12 months ending in October. Orange County and the Inland Empire lost 35,100 and 22,300 jobs respectively, with Los Angeles County losing 15,500. Los Angeles County has a population of nearly 10 million, Orange County about three million and the Inland Empire roughly four million.

In terms of absorption, however, Los Angeles County suffered more in 2008 than Orange County did, with 2.9 million square feet of negative net absorption in the office market during the year, compared with two million square feet of negative net in Orange County. Orange County's overall office vacancy rate rose to 13.5% at year-end 2008 from 10% a year ago, while the Los Angeles County vacancy rate increased to 9.5% at year-end 2008 from 7.7% a year ago.

In its outlook for Orange County, Delta Associates expects the overall vacancy rate in Orange County to increase 100 basis points over the next 24 months and to reach the mid-14% range in the next two years. It expects the overall vacancy rate in LA County to continue to rise, reaching reach 10.8% by year-end 2009 and 12.2% by December 2010.

The Delta Associates report also examines a host of other economic and commercial real estate statistics, including investment sales trends, R&D and industrial space. It shows that office investment sales volume in Orange County totaled $852 million for 2008, compared with $3.9 billion in 2007. Prices averaged $289 per square foot, a drop of 4% from the $301 average of 2007. In LA County, sales totaled $3.7 billion in comparison with 2007 sales volume of $8.9 billion. The average sale price was $323 per square foot, down from $334 in 2007.

Demand for Flex/R&D space in Los Angeles County increased in 2008, with all areas posting positive net absorption for the year. In Orange County, net absorption turned negative in all submarkets in the last three quarters of 2008.LA County's overall Flex/R&D vacancy rate fell to 4.2% at year-end 2008, from 5.7% a year ago. Orange County's overall Flex/R&D vacancy rate increased to 5.5% at year-end 2008, from 3.7% a year ago.