Orange County Register

Register reporter Jeff Collins reports …

Construction of new office buildings and layoffs in the financial services and mortgage industries will keep office vacancies high in Orange County through 2008, halting the upward spiral of lease rates, according to the USC Lusk Center’s Casden Real Estate Economics Forecast.

But despite a slight slowdown in sales and rent increases, industrial real estate should remain strong next year, with continued low vacancies, added Delores Conway, director of the Casden Forecast.

Tighter credit, almost no job growth, and falling consumer confidence is leading to a lot of uncertainty, Conway explained. But the slowdown will amount to “a short-term adjustment,” even in the office sector.

“Orange County is still very diversified as an economy. It’s resilient,” she said.

The sixth annual Casden Office and Industrial Forecast is being released today. Orange County’s office-market slowdown is one of the salient points of this year’s forecast, Conway said. The vacancy rate for “Class A” (most expensive) office properties was 11.5% in the third quarter this year, up from 6.9% a year earlier.

That 5% rise in vacancies is due in part to new office buildings being built: 2 million square feet of office space has been completed so far this year, she said. In addition, 1.7 million square feet of office space is under construction.

But even more office space has come back onto the market in the past year after subprime lenders based in Orange County gave up space due to cutbacks, sales and bankruptcies after the subprime industry meltdown last spring.

Conway said 3.6 million square feet became available for rent this year, 2.3 million of that as subleased space.

“It’s like a perfect storm,” she said. “We’ve had a lot of new construction come onto the market. But also we have this sublease space.”

Despite the increase in vacancy rates, Class A rents in the third quarter were up 10.2% in Orange County, and Class B rents were up 9%, she said. The increase is due mainly to the addition of new, higher-rent buildings to the market. Rents next year should stay flat, she said.

The John Wayne Airport area still commands the highest rents, averaging $3.27 per square foot.

The vacancy rate for industrial buildings, meanwhile, was 4% in the third quarter, compared to 3.8% a year earlier, the report says. Rental rates increased 11.9% from the year before.

Although the Casden Forecast doesn’t expect a recession next year, slower growth is likely for a national economy hindered by the housing market downturn. The forecast likewise predicted slower but steady growth for the overall Southern California office and industrial markets.

The West Los Angeles office market is the tightest in the region, the report said, with Class A office rent at $4.30 per square foot and a 7.4% vacancy rate, virtually unchanged from the year before. As a result, many tenants there are opening up satellite offices in the San Fernando Valley or moving to the Valley, the South Bay or even Orange County, Conway said.

Both Los Angeles County and the Inland Empire are among the nation’s top industrial markets due to strong demand from international trade, the report said. The Inland Empire also benefits from cheap, available land that lures large warehouse developers.

[UPDATE: The Casden Real Estate Economics Forecast is copyrighted material available for purchase HERE. The rights to republish the report were unknown when an excerpt was provided in this post when it originally published at 12:07 a.m. Dec. 13.]

You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.