Office Slump Continues, Bid-Ask Narrows

Voit's report showed 676,000 square feet of negative net absorption in the second quarter, for a total of 1.5 million square feet of negative absorption for the year, which the report attributed to job losses that have reduced demand for office space not only in Orange County but in markets throughout the US. As demand has weakened, rents have declined, and the average asking rate for office space in Orange County now stands at $2.29, down 48 cents from the record high rate of $2.77 in the fourth quarter of 2008.

Holdner tells GlobeSt.com that office leases are being signed at rents closer to asking rates than they were two years ago, when rents first began to slide. Landlords were reluctant to lower their published asking rates then, but the deals were being done at significantly below asking rates, so the asked-for rents now more closely reflect actual rates. Asking rents now are at about the same level as 2005, Holdner says.

The office leases being signed today are mainly renewals and often are contractions, with tenants taking less space. And many of the renewals are short-term, one or two years, with landlords and the tenants alike willing to sign for the short-term because of uncertainty about the economy.

Other statistics in the quarterly Voit report reflect how the office market is adjusting to the recession and the weakening of demand. During the first half of 2009, Orange County added a total of 171,863 square feet of new office space, with only 166,059 square feet of space currently under construction.

The total of direct and sublease space continued to rise in the latest quarter, reaching 16.63%, with total availability reaching 22.5%. That's the highest availability rate since the dot.com collapse of the late 1990s and early part of this century, but the with the steep decline in new construction, "We are finally starting to see a slowdown in the velocity of new available space being added to the market," Holdner points out.

Holdner expects lease rates to remain soft for the short term, with concessions continuing to increase in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances. "The office market has not reached the bottom, nor has it begun to improve, but the market is starting to see a slowdown in the amount of available space being added per quarter, as well as an increase in sales activity," he says.

The large sales that closed in the quarter included Los Angeles-based Maguire Properties' sale of its 531,000-square-foot 3161 Michelson Dr. office tower to a New York City-based buyer for $160 million, Maguire's sale of a 460,000-square-foot office complex in the City of Orange for an undisclosed price and Torrance-based Transpacific Development Co's $73 million acquisition of a 270,000-square-foot office complex in Irvine.