Wednesday, December 24, 2008
‘Things don’t need to be good to reverse – just better than expected.’
|With each passing month, the unemployment numbers seem to look bleaker and bleaker, and almost every day, another major American company announces planned layoffs by the thousands. Here in Orange County, the mortgage industry meltdown that began in late 2007 resulted in the loss of thousands of local jobs, and in November, we saw a decrease of yet another 35,000 jobs.
So what does this mean for our local office market, which relies on job growth as an indicator of the absorption of office space and when will it start to turn around?
Those were the million-dollar questions that many experts in the commercial real estate industry attempted to answer earlier this month at the annual RealShare Orange County conference. I had the pleasure of sitting on a panel discussing the office market and where it’s headed, and thought I would share some of the highlights.
First, job losses inherently mean lower office absorption, higher vacancy rates and lower rents. In 2008 thus far, we’ve seen 1.4 million square feet of negative net absorption, and the vacancy rate stands currently at 15.4 percent. Adding sublease space into the mix, the availability rate in Orange County now exceeds 20 percent.
While in the short term these numbers will likely tick higher, there is some good news that led many of the panel experts to give a guardedly optimistic view for 2009.
• We have a diversified economy in Orange County, and some sectors are continuing to show strength, including gaming, bioscience and medical, and law firms (especially those with a bankruptcy practice).
• The recent FDIC lease at Irvine Spectrum is expected to bring 600 new jobs to the region.
• There is no significant new construction in the office sector planned for 2009.
• Lease transaction volumes are relatively steady, although lease terms are shorter and smaller.
Overall, the consensus at the RealShare Orange County conference was that the Orange County office market is facing another rough year in 2009, but there are some bright spots: Prices are cheaper; interest rates are low; and there will be a new direction in Washington, and therefore, hope for a change of course. As someone said: “Things don’t need to be good to reverse – just better than expected.”
Ultimately, a market rebound will depend largely on how effective our policymakers are at managing the economy, creating jobs and restoring liquidity to the market. The billions of dollars policymakers are throwing into the economy will hopefully restore confidence in the market, even if it has a long-term effect on inflation. As a fireman friend said: “When putting out a fire, you don’t worry about the water damage.”