Equity Office Properties Trust, the county’s second largest office landlord, has upped asking rents at its buildings here in the past two weeks.
Chicago-based Equity Office raised monthly rents for new tenants by 25 cents to 40 cents on all buildings in Orange County as of Dec. 8, according to area brokers.
The landlord owns and manages 29 office buildings totaling about 5.7 million square feet in OC, primarily in Irvine and Central County.
The moves come less than a month after Equity Office,the largest office property owner in the country and second locally to The Irvine Company,said it was being acquired by private equity investor Blackstone Group LP, in a record $36 billion deal. The deal is set to close in the first quarter.
“I think the increases are a reflection of Blackstone’s demand to create value for their investment,” said Greg May, senior vice president for the Newport Beach-based office of Grubb & Ellis Co. “They have a different focus than Equity Office, which has had a real drive to get high occupancy rates in their properties.”
Equity’s moves likely are the first salvo in what is expected to be an intriguing 2007 for the office market, which is set to see several towers completed amid record-low vacancy rates.
Whether other area landlords,who long have argued the county’s rents lag other Southern California areas,follow suit with their own increases remains to be seen.
“Rate increases and decreases are always a reflection of market demand,” May said. “But just because one landlord does it, doesn’t mean that others will.”
Equity’s higher rents stand to make the company’s buildings among the most expensive in the county, trailing only the towers around Newport Beach’s Fashion Island.
Around John Wayne Airport in Irvine, asking monthly rents now run as high as $3.55 per square foot at Equity buildings such as 1920 Main Plaza and 2010 Main Plaza.
The best office space around the airport averages about $2.96 per square foot, according to third-quarter data from Grubb & Ellis Co.
The new Equity asking rates also exceed some rents being asked at office towers going up around the airport. Developers of these towers are aiming for rents in the $3.50 per square foot range.
Other Equity airport-area buildings also saw large rent increases this month. Asking rents at Griffin Towers in Santa Ana now are listed at $2.95 per square foot. Irvine’s 2600 Michelson tower, home of the Business Journal, has rents listed at $3.25 per square foot.
In Anaheim and Orange near Angel Stadium of Anaheim, rents run about 20% lower on average than in Irvine. But big increases also are on their way. The company’s 500 Orange Tower now has asking rents of $3.10 per square foot, as does its 21-story City Tower.
Tenants in Central County might find few local options besides renewing,Equity Office is the largest class A landlord in the area. It also owns land there that could see development.
The countywide rent increases are the most aggressive one-time pricing moves seen in the local office market in some time.
The average asking lease rate for all OC offices has risen steadily about 5% during the year. High-rise offices here have seen rates increase about 10% during 2006.
Industry watchers are curious to see how tenants react to higher rates.
Higher tower rents have caused some tenants to move to low- and mid-rise buildings and have slowed leasing overall, according to brokers.
“We’re in a Mexican standoff right now between landlords and tenants,” said Royce Sharf, branch manager for the Irvine office of Studley Inc., which represents tenants in leases.
“If you can afford to wait, we’re telling clients to wait,” he said. “But it is having an unsettling effect on the market.”
There is more than 4 million square feet of office space under construction in the county, including six high-rises due to finish by late 2007. Tenant representatives believe rental rates should begin to moderate, if not drop, with the new space.
“We believe that rents will not be higher (in a few years) than they are today,” Sharf said. “The question is, when does the future arrive?”
“If you think that we’re in the ninth inning of a (landlord’s market), then it makes sense for Equity Office to raise rates now and see if they can get some of their tenants locked in at those rents,” Sharf said.
Landlords, on the other hand, have been banking on higher rents,especially for upscale buildings,in the next few years. They note that 100 floors of new high-rise space only will add about 2% of office space to a market that is seeing vacancy rates of just 7%, among the lowest in the country.
Blackstone’s strategy for leasing up could be different than Equity’s, brokers note. Equity, a real estate investment trust led by Sam Zell, has been more interested in keeping its buildings full, sometimes at the expense of rates.
Under Blackstone, the company is likely to be more inclined to get tenants locked in at higher rents,and less likely to be flexible in rate negotiations.
But Blackstone might be willing to offer more concessions for those leases, such as free rent and tenant improvement deals, brokers said.
