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ORANGE COUNTY, CA-The county’s office market continued to struggle in the third quarter, posting negative net absorption for the third straight quarter this year in response to the ongoing effects of the credit crunch and the mortgage meltdown. Despite the signing of some large deals during the quarter, the office market overall registered higher vacancy, lower asking rates and an increase in total space available.

Third-quarter statistics from Voit Commercial Brokerage showed the county’s office market posting 361,184 sf of negative net absorption in the third quarter, while CB Richard Ellis reported negative net of 392,000 sf. Voit lists the direct vacancy rate at 14.85%, including both direct and sublease space that’s empty, compared with last year’s third-quarter rate of 10.53%; CBRE calculates the vacancy rate at 15.4%.

The two firms come in very close on the overall availability of space, too. Voit pegs it at 20.95% for the third quarter, up from 15.11% in the third quarter of last year, while CBRE figures it at 20.6%. The figures vary slightly because the two firms track different inventories, with Voit listing nearly 108 million sf of office space in the county and CBRE tracking about 100 million sf.

Despite the minor differences in their statistics, the quarterly surveys by the two firms show the same general trends and cite the same factors for the weak performance in what was once one of the best-performing office markets in the country. “The negative absorption can be attributed to the credit crunch and finance companies consolidating,” says the Voit report, authored by Jerry Holdner, vice president of market research.

At CBRE, managing director Jeff Osborn of the company’s Anaheim office and leader of its Southern California Office Specialty Practice comments that, “There’s no question real estate decision makers associated with larger tenants and institutions are operating conservatively and demonstrating a concerned outlook. At the same time, in the third quarter we saw local businesses continuing to move forward in signing new leases and investing in small buildings and condos.” Osborn notes that although leasing activity continued in the third quarter, office deals were approximately 30% smaller, according to CBRE transaction data.

CBRE also points out that the amount of sublease space on the market in the office sector increased in the third quarter by approximately 6%. “While some of this can be attributed to the continuation of mortgage company attrition in the market, the sublease statistics also indicate that as local companies cautiously move forward with operating their businesses, they are doing so with less people, causing office tenants to downsize and/or relocate to smaller quarters and put a portion of their space on the market for sublease,” the CBRE report states.

Holdner tells GlobeSt.com that rising sublease space is one of the factors that is driving down asking rents, which declined to $2.61 in the third quarter, down from $2.77 at this time last year. However, Holdner says that the overall amount of space on the market, including both direct and sublease space and new construction, is a bigger factor than sublease space alone. “There is just a lot of space on the market competing for the same tenants,” Holdner says.

At the same time, Holdner points out that construction is slowing. The amount of new space under construction totaled 292,139 sf at the end of the third quarter, which is almost 90% lower than the amount that was under construction at this time last year. Voit estimates that a total of 1.7 million sf of new construction will be completed this year, most of which has already been delivered. “This will put less upward pressure on the recent rise in the vacancy rate,” Holdner’s report says.

Colliers International’s report on the county’s office market presents a similar view of the situation. “Although the Orange County office market has been one of the first areas in the Greater Los Angeles Basin to feel the effects of the economic slowdown—primarily due to its heavy concentration of real estate-related firms—this does not necessarily mean that the market is closer to the bottom” the Colliers report states. With office vacancies continuing to rise and average asking rental rates declining, Colliers says, “It appears thatthe Orange County office market is in the midst of a prolonged downturn expected to last through the remainder of 2008 and well into 2009.” Colliers observes that Orange County today “is a far cry from just a couple of years ago when the Orange County economy in general and the real estate market in particular were among the strongest in the nation.”

Voit’s figures show that gross activity for the third quarter—the total of all leases and sales—was lower than last quarter at just over 2.1 million sf. That compares to an average quarterly gross activity level in 2007 of 3.2 million sf and an average of 2.8 million sf per quarter in 2006. “The recent lack of activity can be tied to the credit crunch as well, which means we could see an increase in activity in 2009 from pent-up demand once financial markets correct themselves,” the Voit report concludes.

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