SIGNS OF THE TIME

The recent improvement in the U.S. job picture isn't just a boon to the economy and President George Bush's reelection campaign.

It could be the sign office brokers have been waiting for: Companies are hiring again and should be leasing more office space down the road.

Orange County's job growth in March was more lackluster than the nation's, but the county should do well this year, according to Esmael Adibi, director of Chapman University's A. Gary Anderson Center for Economic Research.

The county added 9,600 non-farm jobs in March, versus a year ago, less than a 1% gain.

Nationally, employers added 308,000 jobs in March, the Labor Department said. Economists expected 123,000 new jobs.

And the government announced earlier this month that benefits claims by the unemployed dropped to the lowest level in three years.

Adibi said Orange County payrolls, after shrinking or staying flat in recent years, should grow by 1.7% this year, adding some 25,000 jobs.

More importantly for office leasing, professional services jobs should grow at a 2.7% clip this year, or 17,000 more jobs, he said.

Those job growth figures, while promising, aren't large enough on their own to result in a dramatic reduction of office vacancies, Adibi said. He added that some companies have excess space they will grow into before expanding.

"But vacancies will stabilize at current levels," Adibi said. "Overall, it's a positive development in the office sector."

Strong job numbers definitely are encouraging to brokers, according to Sherry Bower, senior managing director in the Newport Beach office of CB Richard Ellis Inc. But she said even if companies step up hiring, they won't necessarily need more office space right away.

"There's a lag time between employment growth and demand for real estate," Bower said.

The lag time between a rise in job creation and a pickup in office leasing is difficult to gauge, brokers said.

One reason is due to shadow space-the excess space controlled by companies that is not subleased. Some companies retain office space they aren't using in slow times, in case they need it later.

Brokerages know the total square footage of office space in the county. And they know how much space is being leased. Thus they are able to calculate the county's vacancy rate, which is around 14%.

But there is no way to track how much space is being leased but not being used.

In fall, Jones Lang LaSalle Inc. reported that 35% of executives said their excess capacity is more than 15% of their real estate holdings, while 60% cited levels at about 10%, according to a survey of 75 corporate real estate executives from large companies.

Still, brokers said Orange County has fewer large corporate clients than mature markets such as New York and Chicago. In OC, there are more small to midsize companies that seek lower, shorter leases, brokers said.

Leasing interest by tenants has picked up in the past six months, according to Scott San Filippo, executive vice president with Irvine's Crown Realty & Development.

Crown Realty is planning to break ground in the fall on a six-story speculative office project-one of the only sizable spec projects planned in the county-at Xerox Centre in Santa Ana.

The company believes that by the time it finishes the project in 18 to 24 months, the leasing market should be healthy, San Filippo said.

For now brokers continue to enjoy special treatment from office landlords.

Chicago-based Equity Office Properties Trust, one of OC's biggest landlords, plans to keep offering special incentives to brokers, according to Frank Campbell, vice president of leasing.

Equity will continue to pay brokers' commissions within 48 hours of a tenant signing a lease, according to Campbell.

Campbell said the company also will continue to pay full commissions to brokers who negotiate lease renewals with existing Equity tenants. In hot leasing markets, landlords sometimes deal directly with tenants on lease renewals, cutting out the broker.

"They are long-term programs," Campbell said. "They weren't just reactions to a low point in the market."

One big question for 2004 is which companies will be taking big blocks of space. In 2003 the biggest leases were done by mortgage companies and homebuilders.

Homebuilder Lennar Corp., based in Miami, signed last year's biggest office lease at 137,000 square feet of space in Aliso Viejo. Orange-based Ameriquest Mortgage Co. signed the second largest deal last year, taking 128,000 square feet at a Trammell Crow Co. project in Anaheim.

Ameriquest is a subprime lender-it specializes in loans to people with less than perfect credit. The company also is expanding into other types of mortgages.

Mortgage companies got off to a strong start this year with the February announcement that Pasadena-based IndyMac Bancorp leased 123,000 square feet in the Irvine Spectrum. IndyMac said it plans to grow its consumer lending division based here.

But much of the growth in the mortgage and homebuilding industries in recent years is a result of low interest rates.

Once the country shows consistent and strong job growth, most economic pundits expect the Federal Reserve Bank to raise its federal funds rate, which influences everything from bank savings to mortgage rates.

Indeed, the yield on 10-year treasury bonds-a market indicator-shot up to 4.4% after positive economic numbers were released this month. The 10-year yield was as low as 3.7% as recently as mid-March.

These days mortgage companies aren't the main ones looking for space, especially in Central County, said Crown Realty's San Filippo.

"We see activity from healthcare, finance and food," he said. "The Instafis of the world are not the ones knocking down our doors. That is not the demographic of tenants that we are seeing in the marketplace today."

In December Internet-based mortgage lender Instafi.com shut its doors, leaving landlord Equity Office with some 45,000 square feet of empty space in an Irvine highrise.

"The nature of the inquiry has changed from that of a relocation to that of an expansion and new companies coming into the market," San Filippo said.

Technology companies also might step up leasing. After suffering extreme cost-cutting measures in the past three years, they're poised to grow amid solid industry forecasts.

Case-in-point: Irvine-based Quest Software Inc. is set to move from its Irvine Spectrum high-rise to 135,000 square feet of extra space at Fluor Corp.'s campus in Aliso Viejo.

Quest struck a unique two-part deal with Fluor for two of its buildings that face the San Joaquin Hills (73) Toll Road. The business software maker is leasing 57,000 square feet of one building and bought the other 78,000square-foot building.