Reis Updates Orange County Observers

The Reis Observer team posted 2nd Quarter 2010 Orange County, California market narratives for all property types. Here are brief summaries from each commercial property report.

Apartment Market Data

Data on apartment occupancy do not suggest by themselves the stress that the market has suffered. Indeed, the vacancy rate has not risen as high as 6.5% since the troubles began. Rental growth numbers, on the other hand, provide a more telling insight. Indeed, what the Orange County Register described in late June as the “worst ever” market conditions—“a mix of falling rents, empty units and rising costs”—has befallen the county’s beleaguered landlords. While a number of construction projects have been delayed, including projects in Anaheim’s Platinum Triangle redevelopment area, a substantial volume will deliver all told in 2010 before activity ceases. It then remains for the market and the financial sector to dictate the timetable for the resumption of construction; numerous substantial projects remain in planning and proposal stages.

Commercial Office Space

Waiting—and the development of medical office properties—are the main activities in the Orange County office market. The severe blows struck by the contraction of the large mortgage-industry tenant base (and by the recession) brought the market to a virtual standstill as demand withered and construction came to a halt. There are no non-medical, competitive office projects under construction and no near-term starts are anticipated, despite an abundance of projects in planning phases. Indeed, with net absorption running negative (often steeply negative) virtually without relief since late 2007, there is much vacant inventory to digest. The best signs at present with respect to recovery are the recent flattening of the vacancy curve and stabilization in rents. In addition, employment in the business and professional services sector has stabilized (a modest gain is indicated by BLS for June). Modest positive net absorption is anticipated by Reis for the remainder of the year.

Commercial Retail Property

Orange County’s characteristically subdued retail real estate development profile, due to high land cost, availability, and other issues, was an unintended fortification against the recession that swept over the local economy. While vacancy rates increased, they remained well within the bounds of what is typically considered healthy occupancy. Moreover, vacancy in the community and neighborhood center sector has been inching downward for several months and, as reported by Marcus & Millichap in its second quarter report on the local market, an improving economy will encourage retailers to fill vacant spaces in a relative vacuum of new development. Orange County lease rates, however, have proven acutely sensitive to increases in vacancy and the indicated imbalances of supply and demand, however modest they may seem to be from a statistical vantage point. Losses became the abiding theme for rents in late 2008 and have remained so per the date of this report.

Industrial

It is not unusual for a mix of trends to attend the beginning of a market recovery. Not all parameters show improvement at the same pace. That seems to be the case with Orange County industrial. In an almost paradoxical comment, Colliers International sees “small steps in the right direction even though overall fundamentals continue to decline.” The firm cites a decline in “availability” alongside an increase in vacancy and ongoing negative net absorption. “Though there are positive signs of a rebound,” states Grubb & Ellis, “challenges persist: Orange County’s unemployment rate may climb to double digits and consumer confidence lacks stability. Economic recovery is ahead, but only when these challenges are overcome.” Cushman & Wakefield notes that the market “is currently bottoming” and that “this climate will create unique opportunities for both well-positioned investors and tenants in industries less affected by the recession.”  Reis’s reporting on its multi-tenant, nonmanufacturing space market indicates a gradual recovery now under way—in the form of a reduction in the pace of losses and setbacks rather than in the form of positive numbers. Thus, vacancy continues to rise and rents continue to lose ground, if more slowly, while net absorption remains negative, if in more modest proportion. A marked slowdown in construction, including no space delivered last year, lends support.

Full versions of these reports including further detail on the 2nd quarter 2010 results are available now.