Tuesday, July 14, 2009

CRE: Higher Vacancy Rates, Lower Rents in San Diego, Orange County and Las Vegas

by Calculated Risk on 7/14/2009 07:58:00 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. It also shows new construction has slowed sharply. 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 1988. 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:

Net absorption for the county posted a negative 672,880 square feet for the second quarter of 2009, giving the office market a total of 1.5 million square feet of negative absorption for the year.
...
During the first half of 2009, Orange County has added a total of 171,863 square feet. Over the past three and a half years, over seven million square feet of new construction has been completed in Orange County. ... Total space under construction checked in at 166,059 square feet at the end of the second quarter, which is almost half the amount that was under construction this same time last year.
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:
During the first half of 2009, San Diego County has added a total of 600,000 square feet. Over the past three and a half years, over 9.2 million square feet of new construction has been completed in San Diego County. ... Total space under construction checked in at 956,711 square feet at the end of the second quarter, which is less than half the amount that was under construction this same time last year ...
Although Voit didn't provide a similar graph for Las Vegas, the situation is clearly worse:
At the close of the second quarter, approximately 10.9 million square feet of vacant office product remained on the market, producing an average vacancy rate of 22.1 percent. When excluding owner-user buildings, the vacancy rate jumps to 24.2 percent for speculative space. Vacancy rates are up from the 19.6 percent posted three months prior, while the comparison to the 16.9 percent vacancy rate from the second quarter of 2008 is even more dramatic.
...
Some areas are expected to reach 30-percent vacancy rates ...

The market reported 1.4 million square feet of space that remained in some form of construction. It is worth noting that approximately 0.4 million square feet is located in projects that have stalled or delayed activity.
emphasis added
New office construction has almost stopped in these markets.