Orange County: Canary in the Coal Mine

One of the early signals of the credit crisis that has turned the U.S. financial markets upside down showed up in Orange County, Calif. There, the office market featured a 7 percent vacancy rate as recently as the fourth quarter of 2006–a number that has inflated to 20 percent today.The market is home to a large number of mortgage firms, and consequently began to suffer as those firms either ceased operations or shed workers as the subprime housing crisis began to unfold, with serious tremors felt throughout the market. Ameriquest has given back the most office space in the market, according to Leland Bruce, senior managing director of the Irvine, Calif., office of Jones Lang LaSalle Inc., while the bankrupt New Century Financial Corp. also vacated space, never completing a 300,000-square-foot lease it signed at Maguire Properties’ Park Place in Irvine in 2007. Other companies in the field have also influenced the market. “The homebuilders began to feel a lot of pain; the title companies began to feel a lot of pain,” Bruce observed. Vacancy rates have risen so high, they have sent rents on a downward spiral. Class A rents reached about $30 per square foot in September, according to Jones Lang LaSalle, $4 to $5 lower than at this time last year. A sign of how high some mortgage companies were flying is that some firms would rent unneeded office space, leaving it vacant, to increase the number of parking spaces allotted to their companies, Bruce said. But the market is vastly different today.Adding to the bleak picture is the significant amount of new office inventory delivered in 2007, just as the downturn intensified, with The Irvine Co. having opened three new buildings, totaling approximately 835,000 square feet; Maguire Properties having added two, totaling 683,000 square feet; and Opus adding a 314,000-square-foot building. Those followed on the heels of Hines’ late 2006 addition of a 12-story, 266,000-square-foot office building. Further pain is likely to come as the U.S. financial sector continues to implode. While Bruce noted that the health of any commercial real estate market comes down to a “supply-and demand-equation,” Washington Mutual, recently acquired by JP Morgan Chase, has put its large office campus up for lease in Irvine, while Wachovia, just acquired by Citigroup, also has a large presence in the market, the future of which is still to be determined.