Tuesday, April 21, 2009

More on Office Vacancy Rates and New Construction

by Bill McBride on 4/21/2009 01:55:00 PM

Voit released quarterly reports today for CRE in Las Vegas, San Diego and Orange County.

The reports show the vacancy rates are up, and lease rates (falling rents), net absorption, transactions and construction are all down.

It appears new construction has all but stopped. Here are a couple of graphs for Orange County and San Diego. We are seeing a similar pattern nationwide, although new construction in these areas probably slowed earlier than most of the country.

O.C. Office Vacancy Rate and New Construction
Click on graph for larger image in new window.

This graph shows the annual Orange County office vacancy rate and new construction since 1998. (See Voit report for more.

In 2007 the rapid increase in the vacancy rate was due to a huge increase in new space combined with negative absorption as a number of Orange County financial companies (like New Century) went under. New construction has almost stopped, but the net absorption rate is still negative, so the vacancy rate is still rising.

Because of the concentration of subprime lenders in Orange County, the office space market was hit earlier than other areas of the country.

From the Voit report:

Total space under construction checked in at 173,209 square feet at the end of the first quarter, which is almost 80% lower than the amount that was under construction this same time last year. ... The office vacancy rate (for direct and sublease space) finished the year at 15.58%, constituting an increase over last year’s rate of 13.28%.
Although the chart only goes back to 1998, the record year for new development in Orange County was 1988, when 5.7 million square feet of new space was added. The vacancy rate peaked at approximately 24% in 1988 (the S&L crisis related office boom).

San Diego Office Vacancy Rate and new construction The second graph is for San Diego. The dynamics are similar, but construction halted later than in Orange County. From Voit:
The office vacancy rate (for direct and sublease space) finished the quarter at 16.03%, constituting a 25.23% increase over last year’s first quarter rate of 12.80%. This increase is a result of the new construction, 2.5 million square feet during 2008, coupled with a slowing economy ...

Currently there is 1.3 million square feet of Office construction underway, and total construction is lower than it was a year ago when 3.2 million square feet was under construction. This is a decrease of 59% when compared to last year ...
Although Voit didn't provide a similar graph for Las Vegas, the situation is clearly worse:
The valley-wide average vacancy rate reached 19.6 percent, which represented a 2.0-point increase from the preceding quarter (Q4 2008). Compared to the prior year (Q1 2008), vacancies were up 4.9 points from 14.7 percent.
...
The northwest witnessed the completion of Montecito Point near the intersection of key freeways, the Interstate 215 and US-95. The 186,300-square-foot building remains substantially vacant.
...
As of the close of the quarter, approximately 1.9 million square feet was in some form of construction. The southwest reported nearly 1.1 million square feet underway. As market conditions continue to shift, the timing of selected projects remains uncertain. Nearly 30 percent of product identified as under construction has delayed timing, halted material development activity or in the foreclosure process ...
emphasis added
Although each market is different, clearly new office construction has all but halted.