Office Vacancies Increase as Construction Continues

Vacancies continued to grow in Orange County’s larger office buildings during the third quarter, Coldwell Banker Commercial Real Estate Services reported.

The vacancy rate in buildings of more than 30,000 square feet hit 22.2% during the quarter, the commercial real estate brokerage said, up from 21.6% during the spring and about the same as a year ago.

Vacancies have remained in the low 20% range for more than 2 years as dozens of new office buildings have opened. Coldwell Banker counted 4.2 million square feet of office space under construction in larger buildings at the end of the third quarter, down only slightly from 4.4 million square feet under construction at the beginning of the year.

Rapid Leasing Necessary

Brokers say high vacancies are acceptable if tenants are also leasing space rapidly, and that has been the case in Orange County since the last recession ended in 1982.

But this year, leasing activity has slowed slightly from 1987, when tenants leased an all-time record amount of office space in the county. This year’s expected 6 million square feet leased will be about 10% below last year’s activity, Coldwell Banker said, but that will still be the second highest level in the county’s history.

Even at that rate of leasing, however, there is still a 39-month supply of office space on the market.

That has also slightly reduced the amount that building owners can charge for rent, the brokerage’s quarterly survey found.

Owners were asking an average rate of $1.71 per square foot a month, down slightly from the $1.72 owners were asking in the previous quarter. Owners a year ago were asking $1.63. That is excluding concessions such as free rent for part of the lease and bigger allowances by the owner for adapting the office space to the tenant’s needs.

Costa Mesa-Airport Area

Where are all the new office buildings going up? Of the 4.2 million square feet under construction at the end of the quarter, by far the most--2 million square feet--were under construction in the South Coast Metro-John Wayne Airport area.

Another 1.3 million square feet was under construction in the relatively undeveloped south county, and only 800,000 square feet was being built in the dense central county area. Almost 60% of all this construction was in high-rise buildings, which the brokerage defined as buildings more than eight stories tall.

For all the construction, the South Coast Metro-John Wayne Airport area still had a slightly lower vacancy rate than the county average at 20.6%, the survey says. Older areas of the county tended to have higher office vacancy rates. The reasons varied: In Anaheim, for instance, it was because several buildings had just opened during the quarter, putting much more office space on the market.