Hot Sheet
OC Office Hits the Skids
Kurt Strasmann, executive vice president and managing
director for Grubb & Ellis Co.’s Orange County and Inland Empire offices, thinks it will take the OC’s office
market 12 to 18 months to show signs of a lasting turnaround.
Beginning his commercial real estate career in 1985 as a broker
with the G&E’s Anaheim office, Strasmann moved into management in 1994 after nine years as a top-producing broker. Strasmann
discussed his views about what the future holds for
Orange County with Real Estate Southern California
contributing writer Jo-Ann Cubello.
tant to make decisions regarding any significant change in their
business planning and companies take a wait and see approach.
Our strongest asset is the long-term fundamentals of the Orange
County market. It has an incredibly skilled local workforce, excellent executive housing, a terrific work environment with excellent
infrastructure for any firm and a very diverse economy. We also
have an abundance of quality real estate assets. We are positioned
extremely well for the future.
How has the collapse of subprime mortgage
lenders affected Orange County office space,
and how has it changed the market over the past
two years?
Kurt Strasmann: It is important to know, prior to
the last 18 months, that demand from tenants
related to subprime mortgage lending drove the
Orange County market, and vacancy plummeted
to 6.5% at one point. Lease rates and sale prices
were rising at an incredible rate, which led to sig-
nificant construction. But the market hit the skids
in the first and second quarters of 2007 and fell
dramatically. People went out of business and a lot
office space became available. Initially landlords
and sellers were still bullish and would not reduce
their asking rates, but at the start of 2008 landlords
finally got aggressive and rents moved down quickly and conces-
sions increased significantly. Over the past six months, activity has
been stable and fairly consistent, although the majority is lateral
movement with no real growth in occupied space, and the va-
cancy rate has risen to about 15.2% and is moving up. One of the
biggest changes has been the shift from substantial positive ab-
sorption to dramatic negative absorption. The market recorded
two million square feet of negative absorption in ’07; we’re fore-
casting another 1.8 million to two million square feet of negative
absorption for ’08 and another two million square feet in 2009,
which should be the bottom of the market.
“Job growth is
the key indicator
to watch because
that is what
drives demand
for office space.”
KURT STRASMANN
Grubb & Ellis
How low will vacancy rates go in OC next year?
Strasmann: Vacancy is currently at 16.2%. It will not
decline in the immediate future. We expect vacancy
to hit a high of 20% to 21% in the third or fourth
quarter of 2009 and then start dropping. It will take
some time for us to get back to the 10% to 12%
range. We expect effective lease rates to decrease
another 7% to 10% over the next 12 months and
then begin to rebound in late ’09 or early 2010. We
still have significant negative job growth in the forecast for 2008 with a loss of 25,000 jobs projected.
In 2009, job losses are predicted between 17,000
and 20,000. We expect 2010 will be the breakout
year when job growth becomes positive again. Job
growth is the key indicator to watch because that is
what drives demand for office space.
Is the user going to be king?
Strasmann: Yes. If you’re a quality tenant, it is an excellent time
to lease space.
What is the biggest blot on the OC office market? What is its
strongest asset?
Strasmann: It’s the negative news on the economy. Every day we
read about huge companies going bankrupt, increasing unem-
ployment, stock market losses and a depressed housing market.
It is difficult to create a sense of urgency when everyone is hesi-
What deals have fallen though? Who is left, and why?
Strasmann: On the leasing side, transactions are more difficult
and take a lot longer to complete than in the past, but they are
getting done. I feel landlords understand the current state of the
market and will do what it takes to consummate the transaction.
Long-term lease transactions are difficult because most people
feel the market will swing back within 12 to 24 months, thus
landlords are hesitant to commit to long-term transactions that
are six to 10 years. On the sale side, until we work through the
issues of our current financial crisis with no liquidity, we have a
long road ahead. There will always be value in and demand for
quality stabilized assets, but any asset with lease-up risk, value-add development or outstanding issues will be extremely difficult to sell unless the owner is willing to take a significant price
reduction from today’s perceived value.—SOCAL
