Office Market Rents Sag, Space Empties

Holdner says that perhaps the most striking statistic in the first-quarter report is the increase in available space. The total amount of office space available in Orange County, including both direct and sublease space, was 22.41% in the first quarter, up from the 18.69% in the same quarter last year. This is an increase of almost 20% of new space being marketed in Orange County when compared to the same quarter last year.

Another statistic remaining in the negative column is absorption. Net absorption for the county totaled a negative 691,274 square feet for the first quarter, giving the office market a total of 3.4 million square feet of negative absorption for the last eight quarters. When the market was strongest, in the years 2004 through 2006, it was absorbing about 3.3 million square feet per year.

Colliers International paints an even bleaker picture in some respects in its report on the first quarter, saying that "In the first three months of 2009, any cautious optimism felt in the Orange County office market was shaken with significant deterioration in office market fundamentals." It pegs net absorption higher than Voit's numbers at a negative 1.1 million square feet, but it calculates the total vacancy rate lower at 19.5%--but still up nearly a full percentage point. The Colliers report adds: "It is no longer a question of whether vacancy will hit 20%, but how high will it go."

Holdner tells GlobeSt.com that the outlook for the time being is for rental rates to remain soft and concessions to continue to increase in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances. He notes that landlords are willing to give significant free rent these days--sometimes up to six months--in lieu of tenant improvement dollars.

Holdner also expects that construction of new office space will remain nearly halted for the foreseeable future. He points out that only two office buildings of 120,000 square feet were added in the first quarter, and the amount of space under construction totaled 173,209 square feet at the end of the first quarter, almost 80% lower than the amount that was under construction this same time last year. "That's a good sign," Holdner says. He estimates that more than five million square feet of office projects are on hold as developers wait for the economy to improve.

The slowdown in construction is a dramatic change from just a few years ago.Over the past three years seven million square feet of new construction has been completed in Orange County. The record year for new development was 1988, when 5.7 million square feet of new space was added to the county's inventory.

Holdner says that although the numbers don't reflect it yet, there are signs of increased activity in the office market as more prospective tenants have been looking at space, particularly near the end of the quarter. In addition, he points out that the total of sales and leasing in the first quarter edged up to about 2.5 million square feet. That's up from 2.4 million square feet per quarter last year, but it's still below the historical average of 3.2 million square feet of sales and leasing per quarter in the county.