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Thursday, Mar 28, 2024
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WAITING GAME

It’s more of the same for Orange County’s office market, judging by first-quarter results.

Vacancy rates are falling, lease rates are rising and there’s little new office space opening to upset the balance that favors landlords.

The county continues to record some of the lowest vacancy rates in the U.S., jousting with parts of Los Angeles, Seattle and the Washington, D.C., area for the title of tightest office market in the country.

OC’s office vacancy rate is down 12% during the past year to 7.96%, according to Voit Commercial Brokerage LP. That’s a near record for the county, according to Voit.

For high-end office space, OC vacancy rates are even lower,less than 7%, according to Jeff Manley, chief executive of Cresa Partners LLC, a Newport Beach-based tenant representation company.

Either way, it’s a far stronger region than Atlanta, Chicago, Dallas or many others around the U.S. Those cities have struggled just to reach 80% occupancy in recent years, a result of sluggish economies and too much office space.

OC also is setting a furious pace on the lease rate front. In the first quarter, the average office lease rate jumped 4.88% to $2.39 per square foot, full service gross, versus the fourth quarter.

That’s the largest single-quarter lease rate jump in nearly a decade, according to Jerry Holdner, vice president of market research for Voit’s Irvine office. It’s also OC’s ninth consecutive quarter of positive lease rate growth.


Jobs Are Up

OC rent increases in the first quarter are a product of the same trends playing out across the country during the past three years: strong job growth and low unemployment, which mean companies are taking up more space.

There also is a game of follow-the-leader going on in OC. Recent moves by The Irvine Company, the county’s largest landlord, to boost rents after buying high-profile office towers in the area around John Wayne Airport is allowing other landlords to be more aggressive in setting rents, brokers said.

Average monthly rents at Newport Gateway Center and Irvine Center Towers are up 10 cents or more per square foot since the Irvine Co. wrapped up the acquisitions earlier this year, sources said.

Tenants were being charged from about $3 to $3.20 per square foot for space at Newport Gateway Center, according to CoStar data from before the acquisition.

“The Irvine Co. pushed up rates, and the other landlords are drafting behind them,” said James Proehl, managing director of PM Realty Group’s Western division, based in Irvine.

Rent increase are expected to continue for some time, though not likely at the same pace seen in the first quarter. Brokerage Cushman & Wakefield Inc. projects a 3% increase in overall asking rents during the next two years.


and Construction Is Down

Tenants lament that office development isn’t keeping up with the increased demand.

About 3 million square feet of office space was under construction in the first quarter. While that’s far more than a year ago, there was only 179,000 square feet of space completed in the period, according to Cushman & Wakefield.

Some 50,000 square feet of the space completed was near John Wayne Airport, the biggest office submarket in the country.

Big office tower projects, including developments by Hines Interests LP, the Irvine Co., Maguire Properties Inc., Opus West Corp. and Caribou Industries, together could bring more than 2 million square feet of space to OC, if they all are completed. The earliest of the projects aren’t expected to be finished until later next year.

Hines of Houston was the first developer to break ground for its office tower, a 261,400-square-foot building at 2211 Michelson Drive.

The Irvine Co., meanwhile, is working on two towers, totaling 630,000 square feet, at the Irvine Spectrum. It’s also developing a 231,178-square-foot tower at Irvine Center Towers.

Also on the plate: Maguire hopes to get final approval soon for its 550,000-square-foot tower at Park Place in Irvine, while Opus West is said to be nearing a kick-off for its 300,000-square-foot tower at its Opus Center complex in Irvine.

Developer Michael Harrah’s Caribou Industries is trying to line up tenants for half of his 600,000-square-foot tower in Santa Ana. He’s required to get those commitments before construction begins.

One lower-rise office project that’s nearing completion is Impac Center on Jamboree Road in Irvine. But the 200,000-square-foot complex is all but earmarked for one major tenant: Impac Mortgage Holdings Inc., a real estate investment trust.

Another low-rise project being built for a specific tenant is the Irvine Co.’s massive 685,584-square-foot development at University Research Park for Broadcom Corp.

Parts of the complex are expected to be ready next year. The chipmaker will leave a big chunk of space at its Irvine Spectrum headquarters when its move is complete in a couple of years.

But the handful of new construction projects won’t solve the space problem. There’s about 73 million square feet of office space in OC. The buildings under construction will boost the total by less than 3% when they’re completed.

And the developments aren’t likely to bring down lease rates. Developers will have to charge $3.50 to $3.70 per square foot to justify construction amid rising costs for cement, steel and other building materials, brokers said.

While law firms and some other tenants at the more expensive OC office buildings should be able to absorb higher rents without much problem, there is a trickle-down effect.

Tenants that typically gravitate toward class B office space were able to move into class A space four or five years ago, when lease rates were significantly lower. Now, as their leases come up at much higher rates, they may have to move back to class B buildings.

Rent usually makes up 5% to 7% of a company’s operating costs, PM Realty’s Proehl said. It could be tough for some tenants moving back to class B to find the space they need, since vacancy in that sector also has fallen.


Lack of Choices

Other than landlords, not many people in the real estate business are celebrating low vacancy rates.

Frustration is setting in for tenants reaching the end of their leases. Tenants looking to move typically expect their brokers to present them with a dozen potential options.

Instead, brokers are giving them just a couple of choices, Proehl said.

“There are fewer opportunities out there,” he said. “For many tenants, you’re seeing them sitting tight, and re-negotiating (leases) at their current spaces.”

The lack of space also is frustrating brokers, hampering their ability to make deals and earn commissions.

Greg May recently joined the Newport Beach office of Grubb & Ellis Co., after years of representing landlords Maguire Properties and Transwestern Commercial Services (see the real estate column for more, page 87).

May said that his decision to leave Maguire was primarily due to the low vacancy rates, which have created minimal “commission-able events” at Maguire’s office projects.

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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