Office, Retail Strong; Industrial Sluggish

There was more than 400,000 square feet of office space absorbed in South Orange County in the fourth quarter.

Office vacancy rates dropped 62.7% versus a year earlier, finishing the year at 4.4%, which is the lowest in recent history.

Lease rates for office properties continued to climb

Retail vacancy rates fell to 3% in the quarter, down from 5.2% a year earlier. That left less than 210.000 square feet available for lease in South County.

Retail rates climbed 9% to $2.78 per square foot in the quarter. Some economists expect retail property rates to slow in the near future, but with the current vacancy rate at only 3%, the sector is unlikely to see any price erosion in the first half of 2006.

Industrial space-manufacturing, warehouse and research and development-continued to be sluggish in the fourth quarter, with negative net absorption of about 100,000 square feet.

Rental rates for manufacturing and warehouse in South County increased 4.3% to 73 cents per square foot, triple net. R&D space saw an asking rate increase of 7.2% to 89 cents per square foot.

What are the challenges and opportunities for leased properties in South County in 2006?

It appears that vacancy rates will continue to decline for office properties, with lease rates estimated to climb about 15% to 20% in 2006.

With total office market absorption last year of 1.7 million square feet and construction of about 1 million square feet expected to finish in 2006, it looks like tenants looking for office space will have fewer options and see increasing rates.

For the Irvine Spectrum area, lease rates for low-rise office and flex tech space is at $1.60 per square foot, triple net. That's the highest rate ever for the area.

Another trend that's affecting South County: property zoned for commercial uses that's being rezoned to residential. Should this trend continue, there might be fewer options for companies looking for larger spaces to lease.

Demand for office and flex tech space should continue in 2006, with vacancy rates dropping to record lows.

The market is beginning to tighten, which means higher returns for landlords and higher lease rates and fewer concessions for tenants.

Perhaps the best strategy for tenants who want to achieve the lowest cost of occupancy possible would be moving from class A to class B space. Another strategy: locking in rates in 2006 versus waiting until 2007 or 2008.