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ORANGE COUNTY, CA-The county’s office market remained weak during the third quarter, posting negative net absorption and lower rents, but some signs of stability are emerging, and investment sales activity has increased. These are some of the conclusions in newly released market reports from real estate services firms tracking the county’s more than 100 million square feet of office space.

Although net absorption for the county was negative, leasing activity was on pace with the nine previous quarters at approximately two million square feet per quarter, noted Kurt Strasmann, managing director of Voit Real Estate Services. Voit calculates the negative net absorption at 438,803 square feet for the quarter, compared with a figure of negative 523,771 square feet according to CB Richard Ellis and a negative net of 277,600 square feet according to Colliers International. Voit tracks about 108 million square feet of office space in the county, while CBRE tracks just under 100 million square feet and Colliers lists an inventory of 77 million square feet.

Voit figures the direct vacancy rate at 16.6% and the availability rate at 23.1%, while CBRE lists the direct vacancy at 15.4% and the availability at 23.6%; Colliers lists a direct rate of 19.1% and a total vacancy of 20.6%. All of them show increases from the previous quarter and from the same quarter a year ago as the recession and job losses continue to take their toll on office markets throughout the US.

Lease rates continued to decline in the quarter, with the average asking full service gross rate per month per foot in Orange County slipping to $2.24, according to Voit, which is a 16.73% decrease over last year’s rate of $2.69 and five cents lower than last quarter’s rate.Colliers figures the average asking rate at $2.31 and CBRE lists it at $2.25.

Despite the negative net absorption, higher vacancy and declining rental rates, the office market is “getting much closer to stabilizing, says Jerry Holdner, vice president of market research for Voit. He cites the approximately two million square feet of leasing activity, the slower increase in the vacancy rate and increased investment sales as examples. Holdner points out that the 16.6% vacancy rate for the third quarter is up only .27% from the 16.33% vacancy of the second quarter. When compared to the 1.56% total increase in vacancy during the previous three quarters, the .27% increase in vacancy this quarter “is a huge slowing of vacancy growth,” he says.

Another number heading in a more positive direction is new construction. Total space under construction was 166,455 square feet at the end of the third quarter, which is less than half the amount that was under construction this same time last year. “The slowdown in construction has and will ease the upward pressure on vacancy going forward,” Holdner says. He points out that the space under construction is all medical office buildings, a sector that has been performing relatively well throughout the downturn.

Holdner also notes the increased investment sales activity along with the nearly normal pace of leasing. “Landlords who have lowered their prices (for rent) and sellers who have lowered their prices are getting the activity,” he says. According to Strasmann, based on several recent sizable investments offerings, Voit projects that investment sales activity “will markedly increase in the fourth quarter of this year and again into the first two quarters of 2010.”

As the third quarter came to a close, Orange County recorded one of the largest office leases in Southern California in some time, as Western Digital Corp. disclosed that it will consolidate its Southern California locations to 365,000 square feet at LBA Realty’s Park Place office project from other Orange County offices. For the rest of this year, Voit expects lease rates to remain soft for the near future, and concessions should continue to increase in the forms of free rent, reduced parking fees, relocation funds and tenant improvement allowances. “We should see an increase in leasing activity as 2009 comes to an end from pent-up demand,” the company’s quarterly report says.

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