Owners, developers and brokers of office space are loving the county’s low vacancy rate.
Tenants hate it.
Brokers expect Orange County’s 7% office vacancy rate to fall further in coming months.
Low vacancies have led to rents shooting up 10% or more in some areas of the county during the past year,good for landlords, bad for tenants.
Meanwhile, current and expected rate hikes are supporting hefty prices of buildings for sale, brokers said.
Vacancies could fall further as a result of limited new office construction amid strong demand for office space, brokers said.
Several high-rise office buildings are planned. The high cost to build a tower may keep some from hitting the market for several years, brokers said.
Taken together, all the companies that are presently looking to lease space in the county need a total of 8 million square feet, according to Scott Johnstone, senior vice president with Grubb & Ellis Co.
Half of the total, or about 4 million square feet, represents expansions, according to Grubb’s research.
There is a total of 79 million square feet of office space in the county, excluding small buildings, according to Grubb.
Tenants taking an additional 4 million square feet would push the vacancy down five percentage points to about 2%. That calculation assumes no new construction and no existing tenants giving back space.
In fact, developers were under way with 2.4 million square feet of office construction at the end of the third quarter, according to CB Richard Ellis Group Inc.
The majority of space under construction in third quarter was low-rise. Some of it was small buildings for sale, which brokerages typically ignore when calculating vacancies.
Brokers said buildings larger than 10,000 or 20,000 square feet are more indicative of market trends.
Demand for space is coming across the board, said Grubb’s Johnstone. Companies seeking space include financial services businesses, insurance companies, software makers, biotech companies, medical firms, attorneys and some automotive-related companies, he said.
Vacancies have fallen quickly in recent months. The county’s overall rate dropped to 6.8% in the third quarter, from 8.3% in the second quarter, according to CB Richard Ellis.
Grubb pegged the county’s vacancy rate at 7.1% at the end of the third quarter.
Mike Meisenbach, a broker with Lee & Associates Commercial Real Estate Services Inc., said the county’s vacancy rate “is the lowest since I’ve been in the business.” He became a broker in 1989.
Meisenbach expects vacancy to decline further in OC, based on strong demand and the acquisition of commercial property by residential developers, especially in Anaheim’s Platinum Triangle and along Jamboree Road in Irvine.
Higher Rents
The Irvine Company is notching up rents as a result of low vacancies at its buildings, according to Matt Moore, a broker in Lee & Associates’ Newport Beach office.
“The Irvine Co. drives all the rents,” Moore said. “They have little vacancy and are pushing their rents hard. The rest of the market has to respond to that.”
The average rate for a class A office building near John Wayne Airport was $2.66 per square foot per month at the end of the third quarter, a 12% jump from a year ago, according to Grubb.
South County isn’t far behind. Its average class A rental rate was $2.59 per square foot per month at the end of the third quarter, a 13% increase from a year earlier, Grubb said.
Yet rates must rise further to justify construction of new office towers, brokers said.
A landlord needs to charge about $3.25 per square foot per month to justify constructing a new building, according to Gary Stache, a broker with CB Richard Ellis in Newport Beach.
“They have already gone up, but they are going to go up again,” Stache said of office rents.
High-Rises On Tap
That line of thinking has led a handful of developers to announce plans for speculative high-rise office towers. Developers said rents should reach a profitable level by the time a new tower is built, which takes 16 months or more.
Still, developers have been “announcing” new towers for the past two years. Skyrocketing prices of construction materials have thrown some obstacles in their planning.
In late 2003, officials with Los Angeles-based CommonWealth Partners LLC began talking up an 18-story tower in Costa Mesa. To date, nothing has happened on the tower and the property since has been sold to Los Angeles-based Maguire Properties Inc.
The story is much the same with towers in other cities. In early 2004, Irvine-based Crown Realty & Development Corp. said it would build a six-story, class A building at Xerox Centre in Santa Ana.
Crown hasn’t broken ground on the tower yet, despite a scheduled starting date of a year ago. (See story, page 3.)
As for the biggest planned tower in OC, developer Michael Harrah is looking for tenants for his proposed 37-story office tower in downtown Santa Ana. He signed an agreement with the city to lease at least half the building before starting construction.
In the area around John Wayne Airport, Houston-based Transwestern Commercial Services was poised to develop the first speculative tower with money partner Philadelphia-based Cigna Corp.
Now industry sources say Cigna is shopping around for an equal partner in the planned high-rise as well as the office park Irvine Center Towers. Transwestern would be bought out in a deal, with the buyer likely taking over construction, sources said.
That leaves Newport Beach-based Irvine Co. in position to be the first to break ground on a speculative high-rise,and two at that. The Irvine Co. is set to start work this month on twin 14-story towers at the Irvine Spectrum.
“I would anticipate further declines in vacancies given the very healthy job market in Orange County,” said William “Bill” Halford, president of the Irvine Co.’s office division, “(That) should result in rents moving north and ultimately lead to new development.”
There are at least two other office towers likely to go forward in the airport area.
Maguire Properties plans a 20-story tower at Park Place in Irvine. Houston’s Hines Interests LP and Fort Worth, Texas-based Crescent Real Estate Equities Co. plan a 260,000-square-foot office tower at 2211 Michelson Drive.
Other Price Hikes
Price hikes of steel, concrete and lumber appear to have tempered, developers said.
But prices still are volatile, according to Dennis Katovsich, senior vice president in the Newport Beach office of St. Louis-based McCarthy Building Cos.
He said some prices move up, others down, creating uncertainty about where they will settle.
The final impact of the hurricanes in the Gulf Coast region on prices still is unknown, Katovsich said. First, government officials in the region and developers have concentrated on planning what to build.
The real impact will come once they start major construction, Katovsich said.
“I think we are really sort of sitting and waiting for the long-term impact of Katrina,” he said.
In any case, prices are not likely to return to historical levels, he said.
