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Will Others Follow Irvine Company Rent Hikes?

The Irvine Company, Orange County’s dominant office landlord, appears to be undertaking its most aggressive office rent hikes for its local buildings in years.

Will other area office owners follow suit? And will tenants go along with the increases?

The answer to those questions will play a big part in the health of the local office market this year, according to a survey of the county’s top commercial brokerages.

Newport Beach-based Irvine Co.—OC’s largest landlord, with a local commercial real estate portfolio topping 400 buildings and 33 million square feet—is increasing asking rates for the majority of its office properties, according to numerous real estate brokers.

Estimates for the increases vary from market to market.

In low-vacancy areas, like the Irvine Spectrum and Newport Center, office rents for higher-end Irvine Co. buildings are rising nearly 10% in some cases, brokers said.

Buildings near John Wayne Airport, which has slightly higher vacancy rates, appear to be seeing closer to 5% monthly rent increases, although Irvine Co. has further pushed asking rents for certain high-rise buildings.

The only market where increases are not as drastic, brokers say, is for Irvine Co. office buildings at Pacific Arts Plaza in Costa Mesa, which has a big hole to fill with the departure of Hyundai Motor America Inc. for its new headquarters in Fountain Valley.

“There’s a lot of talk that they’re raising rents,” said Randall Parker, president of Travers Realty Corp., a tenant brokerage with offices in Newport Beach. “There’s beginning to be a lot of pressure on [local] rents, and it’s being driven by the Irvine Co.”

Irvine Co. declined to address specific rental increases but said the local office market has been showing clear signs of improvement.

“For the past few years, we have seen strong job growth that is being reflected in demand for premier office space in strong locations, resulting in 95% occupancy in our portfolio,” said Steve Case, executive vice president for Irvine Co.’s office division.

“We have seen the same trend play out in Silicon Valley and San Diego, where robust job growth has created demand by companies for workplaces that help recruit and retain employees,” he said. “We are now seeing the same trend take hold in Orange County, particularly where we have done substantial reinvestment.”

Those improvements to local properties, which include on-site fitness centers, outdoor workspaces, conference rooms, dining and other features, are driving productivity and contributing to growth for area tenants, Case said.

Slow Gains

Irvine Co.’s actions appear to be the biggest attempt by the company or any area landlord to increase rents here since the local office market imploded in the wake of the last recession.

Rents have crept up for the past two years in the recovering economy but not at a rate most landlords would prefer.

The average asking monthly rate for an office in OC is now about $1.93 per square foot, up about 5 cents from last year at this time, according to data from the Irvine office of brokerage Voit Real Estate Services.

Rents for class A offices in OC remain nearly 20% below where they were five years ago, despite a 3% increase over the past year, according to a recent market report from the Irvine office of tenant brokerage Studley Inc.

A generally improving economy and forecasts of strong job growth for office positions has many of the area’s larger brokerages preparing for across-the-board increases in office rents, and not just for Irvine Co. properties.

“There’s a lot of room to go up just to get close to where the market was before,” said Greg May, managing director of the Newport Beach office of Newmark Grubb Knight Frank.

May said he expects rate increases to accelerate in the next six months or so, driven in part by multiple tenant bids for available office space.

That’s beginning to be a common occurrence for deals but wasn’t the case a few years ago, he said.

Kurt Strasmann, senior managing director for the OC operations of CBRE Group Inc., said he thinks rental appreciation is already under way and points out that landlords have already significantly curtailed concessions.

“I believe we’re at an inflection point,” said Strasmann, who advises tenants in the market to get deals done sooner rather than later.

The time of OC’s office market clearly being in tenants’ favor “could be on its last legs,” he said.

Pushback

Brokerages that exclusively represent tenants in leases are more skeptical that landlords’ attempts to significantly increase rents will succeed.

In terms of the end of a tenants’ market, “the stats aren’t showing it,” said Royce Sharf, executive vice president for the Irvine office of tenant brokerage Studley Inc.

Studley’s data show OC’s office market still lagging most major metro areas in terms of office-sector jobs. A true office recovery “hasn’t appeared yet,” Sharf said.

Large office users seeking multiple floors have a limited number of options, but tenants in the 10,000-square-foot to 15,000-square-foot range still “have a deep pool of space to choose from,” according to Studley’s latest office report.

Just because Irvine Co. is pushing rents “doesn’t mean that there aren’t other opportunities with other landlords” to find good space at lower rates, said Travers Realty’s Parker.

He said he’s nearing a deal to move a law firm from an Irvine Co. office tower near John Wayne Airport to a full floor of space at Plaza Tower in Costa Mesa—one of OC’s premier buildings—at comparable lease terms.

Tenants probably have a year to 18 months before higher rates kick in for a majority of the local office market, but those that are shopping should start to be more aggressive in their searches, Parker said.

“If you are a tenant, I would [recommend that] you be decisive and not lose an opportunity to paralysis,” Parker said.

Investor Expectations

National investors appear sold on the likelihood of rental appreciation, based on the number of offices snapped up here by out-of-town buyers over the past year.

Active institutional investors here have included AEW Capital Management LP, Cornerstone Real Estate Advisors Inc., Equity Office Management LLC, Goldman Sachs Asset Management, Griffin Capital Corp., New York Life Real Estate Investors and Praedium Group LLC.

OC offices appeal to them due to lower pricing than in many parts of Los Angeles and San Diego, said Strasmann, who noted that those investors also are expecting stronger rent growth in OC than in those markets.

The local market “is still a bargain” in terms of rents, said NGKF’s May.

The number of new area landlords could help play into the hands of tenants, Sharf noted.

“There’s dozens of new owners. That makes it harder to engineer a recovery” in rents, he said. “It makes for a more level playing field.”

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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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