Orange County tenants looking for new office space next year can expect to pay 10% to 13% less in rent next year even though vacancy rates continue to fall, according to the 2010 Casden Forecast prepared by the USC Lusk Center for Real Estate.
And office occupancy levels aren’t likely to get back to peak levels for at least four or five more years, according to the director of the University of Southern California center.
The forecast for Orange County was unveiled this morning at an executive briefing in Newport Beach for Orange County developers and commercial real estate brokers and investors.
Lusk Center Director Richard K. Green said that high unemployment will continue to be a drag on office demand at the same time that changes such as telecommuniting, “hotel” desks and office-sharing allow tenants to get by with less space.
“The office sector will remain depressed as long as unemployment levels remain high,” Green said in a prepared statement. “Clouding the office forecast is a shift in the traditional workplace. … As a result, the office market may not see rent increases until the overall economy improves.”
Specifically, the forecast states:
- Rent for Class A offices — defined as the best buildings in the highest-demand locations — are expected to decline more than 12.9% in 2011. A chart shows Class A monthly rent dropping from around $2.25 per square foot this year to just over $2 a square foot by the end of 2011. By 2012, rent is projected to stabilized at $2 a foot.
- Class A vacancy rates, now hovering at 25%, will continue to drop next year, falling to 20% in the fourth quarter of 2011, and to just above 15% by the end of 2012.
- Rent for Class B offices — defined as either new, medium-quality building is less desirable locations or older Class A properties — are expected to decline 10.3% next year. A chart shows Class B monthly rent dropping from around $1.80 per square foot to just above $1.50 a square foot from the fall of 2011 through the summer of 2012.
- Class B vacancy rates, now hovering at just under 20%, are projected to fall to just above 15% by the end of 2011 and below 15% through 2012.
Green noted that generally pressure to raise rents won’t occur until vacancy rates get below 10% to 12%.
He told the local business leaders that Orange County has lost about 30,000 jobs during the recession. A Wall Street Journal report last year projected also that office tenants are likely to need about 25% less space per employee — equivalent to perhaps 45,000 additional office jobs, Green said.
Even if you assume that telecommuting and office sharing results in just 20,000 fewer office jobs, it likely will take four or five years for occupancy levels to get back to the peak rates seen in 2005-06, he said.
“I’m just warning I don’t know when we’re done with the shrinking,” he said. While demand remains high for trophy buildings in good locations, those properties aren’t representative of the overall market.
“There may be fewer of those properties” in the future, he said.
The Lusk Center plans to unveil the rest of its office and industrial forecast for Southern California at the Los Angeles Marriott on Tuesday morning.
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