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ORANGE COUNTY-The Orange County office market continued to weaken in the second quarter, posting negative net absorption, higher vacancy and lower average rental rates, according to a newly released report from locally based Voit Commercial Brokerage. The report cites mortgage industry woes, the slowing US economy and the addition of substantial amounts of new construction as reasons that the formerly record-setting office market has deteriorated.

Negative net absorption now totals more than 1.1 million sf for the year, vacancy has climbed to 14.46% compared with last year’s second quarter low rate of 8.95% and average asking rental rates have slipped to $2.69 from last year’s second quarter rate of $2.76. The total amount of office space available in the 107-million-sf Orange County market, including both direct and sublease space, reached 19.76% in the quarter, up from the 13.2% this time last year.

Some signs indicate, however, that the market may have reached bottom, raising the question of how long it will remain there before recovery begins, says Jerry Holdner, a Voit vice president and chief of research for the firm. Holdner tells GlobeSt.com that although the market posted negative net absorption of 295,436 sf for the second quarter, that figure was considerably lower than the more than the negative absorption in the first quarter.

In addition, Holdner points out the jobs picture is brightening in Orange County. Although the county lost 21,000 payroll jobs over the last 12 months, most of which were in financial services, it gained 3,300 jobs between April 2008 and May 2008, mostly in the government, leisure and hospitality sectors. Chapman University is forecasting 18,000 payroll jobs will be lost in 2008, with a gain of 14,000 jobs in 2009.

Another factor that should slow the pace at which vacancy rises is the decline in new construction, Holdner notes. During the first half of 2008, Orange County added just over 1.4 million sf of new office development, most of which was in the Airport and South County submarkets. Voit estimates that a total of 1.7 million sf of new construction will be completed this year, meaning that most of the new space has already been delivered. “This will put less pressure on the recent rise in the vacancy rate,” Holdner observes.

The same factors driving vacancy up and rental rates down have also slowed overall leasing activity, which totaled approximately 2.3 million sf in the second quarter, about the same as the first quarter. This compares with total leasing activity that averaged 3.2 million sf in 2007 and of 2.8 million sf in 2006.

“The recent lack of activity can be tied to the credit crunch, which means we could see an increase in activity in the second half of 2008 and going into 2009 from pent-up demand,” Holdner says. He expects that lease rates will remain at current levels for the short run, and concessions should continue to increase in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances.

For the long term, Holdner says that the region’s strong local economy and high quality of life continue to make it a desirable location for business. The growing influence of new industries such as high technology, biotechnology and healthcare should further diversify the local economy and help to rejuvenate the office market, he adds.

Market observers have long echoed those sentiments about the long-term prospects for Orange County office buildings. Good long-term prospects are one reasons that investors are expected to show interest in some high-profile Orange County office buildings that Los Angeles-based office REIT Maguire Properties is placing on the market, including the 105-acre Park Place real estate campus in Irvine. Maguire said recently that it plans to sell its Orange County assets to pay down debt and for other general corporate purposes.

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