Landlords to Gain With Little Construction Coming

The South Orange County office market continued its slow and steady move forward in the third quarter, with vacancy rates ending at 13.1%, down from 15.7% a year earlier.

But tenant demand, reflected in net absorption, was a less than inspiring 181,000 square feet. In fact, the South Orange

For some landlords, the pain continues in the form of lower than desired rents, with free rent still an expected concession.

Conversely, tenants confident enough to sign up for longer-term deals continue to enjoy the residual effect of a market with soft demand.

For landlords, good news is on the wayit's not a matter of if, but when. The laws of supply and demand ultimately will rule. With no substantial new supply, momentum is in landlords' favor.

During the past few years, construction has been primarily limited to small office/research and development buildings for sale. So with the supply spigot practically turned off, the timing of increased rents will be determined by demand.

Rents could increase with even a small surge in demand for space. Another key aspect of the market is the lack of quality large blocks of space. While smaller spaces are plentiful, the number of 30,000-plus blocks of space can be counted on one hand.

The limited choices in this area may lead to increased rents while landlords still fight it out for smaller tenants.

Developers already have plans for new office developments in Aliso Viejo and the Irvine Spectrum. However, these developers may have to forego the preferred method of pre-leasing space prior to construction.

Skyrocketing construction costs have the projected rents for new class A developments in OC ranging from $2.90 full service gross to more than $3-much higher than existing class A average asking rents of about $2.23.

The key economic factor for South County landlords during the balance of the year, and into early 2005, will be job growth. As the number of jobs increase, so will rents.