VIRUS THREATENS OFFICE GROWTH

Healthy tenant demand for office space continued through the first half of March when the global coronavirus crisis hit home. For most of last year companies were expanding their office footprints in Orange County and lately finding the effective rents in premium buildings to be irresistible.  Virtually overnight, however, and barely a decade after the last recession people are speaking of a “new normal” but without yet knowing exactly what it will be.

 At this early stage in the crisis, it’s too soon to predict beyond the second quarter how long the health emergency will last or its toll on the economy. The uncertainty has caused most transactions to be delayed or canceled. An early April survey of national economists found on average that the contraction will cause unemployment to spike to as high as 13% before a recovery begins in the second half.

 Going into the coronavirus lockdown, demand for Class A space posted nearly 382,000 SF of net absorption in Q1, the most in two years, during which 1.4 million SF of new space has been completed.  In the last two quarters, Class A netted 530,726 SF of new tenants but negative absorption in Class B space totaled 476,308 SF.  Overall, the last three years have been the weakest of the recovery averaging 548,000 SF of net absorption annually compared to a yearly 1.6-million-SF average from 2011 through 2016.

 Economists assert that in contrast to the last contraction, which stemmed from a financial crisis brought on by subprime mortgage recklessness, the coming coronavirus recession will be more akin to a natural disaster that blindsided an economy with healthy fundamentals.  

 Before the 19-month downturn that began at the end of 2007, the Orange County office market already was softening from the emerging subprime mortgage debacle. Many of the nation’s failed lenders had occupied acres of Orange County office space. Office tenants shed 5.9 million SF of space in three years, starting in the second quarter of 2007.  The vacancy rate soared from 9.1% to 18.6%.  By Q4 2012 average asking rents fell 28% and did not recover until Q1 2018. The recession idled 161,850 Orange County workers or 10.7% of the labor force. 

 There may be some positive signs. Because of early social distancing policies in California, official reports are stating that the spread of the coronavirus in the state may have been slowed.  Additionally, the $2.2-trillion federal rescue package is clear evidence that congress is committed to stimulus spending. At this time it’s vital to work to flatten the curve of new coronavirus cases to reduce stress on the healthcare system and enable a quicker economic recovery. 

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