Office Market Shows Signs of Turning Corner

ORANGE COUNTY-More and more, the Orange County office market is showing signs of turning the corner. The office market showed positive net absorption for the full year in 2010 for the first time since 2006, according to Voit Real Estate Services. Along with positive absorption, other signs pointing to recovery in the county's office market are the longer leases that tenants are signing, the slowing rate at which rents are declining and an increase in investment sales, according to Jerry Holdner, vice president of market research for Voit Real Estate Services.

Voit's year-end report for 2010 shows positive net absorption of nearly 399,000 square feet of office space, compared with negative net absorption of more than three million square feet in 2009 and more than one million square feet in 2008. In addition, it shows that the average asking rental rate for office space in the county dropped only a penny to $1.99 in the fourth quarter, compared with a considerably faster rate of decline in preceding quarters. Holdner tells GlobeSt.com that he expects the rate of decrease in rents to continue to slow, and he forecasts that the average asking rate will dip by only a penny or so in each of the next two quarters.

"I think it is safe to say that lease rates are very near the bottom," Holdner tells GlobeSt.com. "I think rates will pretty much bounce around at this level for the rest of this year and remain where they are until 2012."

Voit's year-end report is the latest in a number of reports that it and other firms have issued in the past year or so that showed inklings of improvement in the county's office market. Last year, CBRE was the first to show positive absorption in the county in its second-quarter report. In the third quarter, Voit and Grubb & Ellis Co. also showed their first positive absorption in several years.

Grubb & Ellis, in a forecast issued this week, noted: "The deterioration of rents and increase in vacancy noticeably slowed in 2010. Stagnant absorption due to a lack of white collar job growth and the resulting flat demand for office space pushed rents down and the overall vacancy rate up to 20.7%."

Voit's numbers show the county office market vacancy rate at 17.45% and the availability rate at 21.38% at the end of 2010, both down for the year. Holdner forecasts the vacancy rate will decrease to 16.9% by the end of the second quarter this year and the availability rate will dip to 20.75%.

Despite the trend toward stronger fundamentals, both Voit and Grubb & Ellis say that full recovery remains a distance off for the office market, which must still work through substantial official vacancy as well as shadow space—square footage that does not show up on the official vacancy figures because companies are leasing it but are not using it.

"Even with anticipated growth of white collar jobs there will be a delayed effect on lowering vacancy: Companies have empty cubicles and bare offices that can be immediately filled with new hires," Grubb & Ellis says in its forecast.

Jobs remain one of the biggest question marks for the office market in Orange County, as they do nationwide. Holdner notes that Chapman University is forecasting that the county will gain 23,000 jobs this year, and Grubb cites the Los Angeles County Economic Development Corp.'s forecast of a 1.3% increase in white collar jobs in Orange County this year. Irvine-based hybrid car developer Fisker Automotive expects to hire 100 workers this year, Holdner notes, and other firms have announced hiring plans as well, including some in the mortgage business.

The leasing market is already showing signs of expansion, according to Holdner, who says that although existing companies generally are not taking more space, new companies are coming into the market, primarily start-ups. In addition, existing companies that renew their leases are signing for longer terms, another trend that Holdner sees as a positive development.

"A year ago, a lot of the renewals were for one to three years. Now they are three- and five-year and even some 10-year deals," Holdner says. "Companies are growing more confident."

Voit also expects the pace of investment sales to continue rising, as it did in the second half of the year. The company's chart of significant deals for the year noted that some of the top office sales closed at prices ranging from $162 per square foot (Griffin Towers in Santa Ana) to $380 per square foot (2211 Michelson Dr. in Irvine).

Overall, Voit expects an increase in investment sales activity this year, along with continued positive absorption. Both Voit and Grubb expect landlords to continue to offer concessions including free rent, reduced parking fees, relocation funds and tenant improvement allowances as the market makes its way slowly back toward recovery.