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Market Information: LA/Orange County

Economy:  First Quarter 2008 

Basin Economy: Economic Conditions Soften

The LA Basin economy shed 24,400 payroll jobs over the 12 months ending January 2008. The majority of the contraction came in Orange County, which lost 13,000 jobs. The Inland Empire shed 7,300 jobs and Los Angeles employment declined by 4,100 jobs.

The LA Basin unemployment rate rose to 5.0% in December 2007 from 3.9% a year ago. Regional unemployment mirrors the national average of 5.0%, as Orange County’s weakened job market is causing the Basin’s unemployment rate to rise.

Office Market:  First Quarter 2008

Office Conditions Soften in First Quarter

Los Angeles County maintained the lowest office vacancy rate in the nation in the 1st quarter of 2008, though the rate showed an increase from the end of 2007 and rent increases tapered. The county’s job gains have turned to losses from a peak in 2006, and this is reflected in negative net absorption in the 1st quarter of 2008. However, pre-leasing for speculative projects has increased, which should bolster absorption in coming quarters in 2008. In addition, investment sales activity remains poised for another healthy year.

Highlights:

• Net absorption of office space totaled negative 540,000 SF in LA County in the 1st quarter of 2008.
• Available LA County sublease space totaled 3.1 million SF at the end of the 1st quarter, and now represents 1.0% of standing inventory.
• LA County’s overall vacancy rate was 8.2% in the 1st quarter of 2008, up from 7.7% at year-end 2007 and from 7.8% one year ago. The direct office vacancy rate ticked up to 7.2% in the 1st quarter of 2008, 30 basis points higher than 6.9% at year-end 2007 but unchanged from one year ago.
• There is 9.2 million SF of office space under construction or renovation in LA County in the 1st quarter of 2008, compared to 9.1 million at year-end 2007.
• Deliveries in the 1st quarter of 2008 for LA County totaled 1.3 million SF of office space. Space delivered was 53% leased upon delivery.
• LA County office rents increased at an annualized rate of 2.3% in the 1st quarter of 2008.  Class A office rents increased by an annualized rate of 3.0%.
• Office investment sales volume totaled $1.3 billion in LA County in the 1st quarter of 2008, compared to $1.9 billion one year ago.  Office sale prices averaged $305/SF in the 1st quarter of 2008, compared to $308/SF at year-end 2007.

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Orange County, Market Fundamentals: Rapidly Declining

Orange County market conditions were weak in the 1st quarter of 2008 as a result of strong economic headwinds. The negative effects of the national credit crunch have become more apparent, as demand for office space in Orange County, which is home to a significant share of the country’s mortgage lenders, has dwindled. Subprime lenders reportedly occupy more than 5 million SF of the county’s office space; layoffs in the industry will continue to lessen demand and push up vacancy rates until the industry finds stability. Groundbreakings on new office properties slowed dramatically from just three months earlier, and deliveries are hitting the market no more than 77% pre-leased. In addition, investment sales have also begun 2008 at a slow pace.

Highlights:

• Net absorption of office space totaled negative 1.0 million SF in the 1st quarter of 2008.  This is the third consecutive quarter of negative absorption in Orange County.
• Available sublease space increased by 76,000 SF in the 1st quarter of 2008 and represents 1.1% of standing inventory.
• Orange County’s overall office vacancy rate increased to 11.7% in the 1st quarter of 2008, compared to 7.1% a year ago.
• There is 1.6 million SF under construction or renovation in Orange County in the 1st quarter of 2008, compared to 4.9 million SF a year ago.
• In the 1st quarter of 2008, 961,000 SF of office product was delivered, compared to 1.5 million SF at year-end 2007. 22% was leased upon delivery.
• Orange County office rents declined during the 1st quarter of 2008 at an annualized rate of 1.7%. Class A rents also struggled, with an annualized decrease of 1.5% in the 1st quarter.
• Office investment sales totaled $134 million in the 1st quarter of 2008, compared to $240 million a year ago. Office sale prices averaged $297/SF in 2007 in Orange County in the 1st quarter of 2008, compared to the $301/SF achieved in all of 2007.

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Flex/R&D Market:  First Quarter 2008

Demand: Increasing

Demand for Flex/R&D space in Los Angeles County gained traction in the 1st quarter 2008, as the South Bay, Westside, and San Fernando Valley submarkets are quickly rebounding from a subpar 2007.  Orange County demand for space was softer, though absorption was positive, with the largest amount of net absorption occurring in the West County submarket.

• 1st quarter 2008 net absorption by county:
  • Los Angeles County  501,000 SF
  • Orange County            61,000 SF
• Available Flex/R&D sublease space decreased by approximately 60,000 SF in LA and Orange counties in the 1st quarter of 2008.  Sublease space now represents 0.5% of the standing inventory in LA and Orange counties.

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