Report Sees More Office Softness in 2002

ORANGE COUNTY, CA-The county’s office market will remain relatively weak throughout the first half of 2002, a new report by Grubb & Ellis says, but will stage a mild recovery in the final six months of the year.

The report says the county’s overall office vacancy factor is currently 10.8%, but a higher 12.3% at class A buildings. It stops short of forecasting exactly how high those rates will go in the first half of next year, but says the gap between what landlords want to charge and what tenants are willing to pay will continue to narrow “as the supply of available sublease and direct space continues to expand while the number of tenants actively in the market remains low.”

“Once thought to be too diversified to feel the effects of all but the most dramatic national economic swings, the county’s residents and businesses must now face a world where there is neither an unending supply of venture capital or expanding businesses,” the brokerage firm’s forecast says. “As landlords learned in 2001, vacancy rates can increase and there can be negative absorption, even in the most well located and highly amenitized office buildings.”

The coming year will also be marked by a growing number of tenants who want to restructure their lease deals, the report adds, in part because they know landlords will be anxious to keep space in their buildings leased. A tenant’s credit will take on added importance, as owners try to avoid repeating the beatings they took over the past two years when many once-promising dot-com companies seemingly failed overnight.

The current glut of flex-tech space, much of which was built for dot-coms, is going to hang around for the foreseeable future. “While well-configured sublease space will be leased in due course, there will continue to be substantial amounts of sublease space that will impede upon this segment of the market past the end of 2002,” the report says.

Still, the overall office market is expected to improve toward the end of the year and get even better in 2003. “Beyond 2002, the basic strengths of the county–including a highly skilled labor force, entrepreneurial population and diversified business base—will pull the market out of its current doldrums and back to a relatively comfortable activity level,” the report concludes.