Orange County’s largest office landlords expect the tight office market and healthy lease rates to continue for the next several years, despite some uncertainty in one of the county’s big group of office workers,the mortgage industry.
“We’re seeing unprecedented times in Orange County,” said Steven Case, the Irvine Company’s senior vice president of leasing. “As landlords, we’re in uncharted territory.”
Case was speaking in Anaheim Thursday at the Southern California Real Estate Conference, sponsored by the OC chapter of the Institute of Real Estate Management.
The tight market spells more tough times for tenants, who have seen lease rates spike during the past couple of years.
Landlords said they are seeing a much better than usual retention rate from existing tenants, despite strong rent increases and fewer concessions for tenant improvements.
The overall vacancy rate for the county’s 93 million square feet of office space was 6% in the first quarter, down from 9.5% a year earlier, according to CB Richard Ellis Group Inc.
The average lease rate was $2.29 per square foot in the quarter, up from $2.05 a year ago.
More drastic lease rate hikes could be on the way as landlords are still trying to figure out the best way to take advantage of the market.
Equity Office Properties Trust isn’t seeing many tenants pick up and move when their leases expire, said Bert Dezzutti, the Chicago-based company’s senior vice president and head of OC operations.
“We’re seeing tenants re-up,” he said. “There’s a lack of options throughout Southern California.”
The historically low vacancy rates aren’t just having an effect on tenants looking to rent. For big real estate investment trusts like Equity Office, the full buildings mean there’s less chance to find a good deal on an acquisition.
The company likes acquisition deals where a building for sale isn’t fully leased.
“We are buying for the long-term cash flow, we’re not too interested in the exit cap rate,” Dezzutti said.
It’s hard to find those kinds of deals in Southern California now, he said.
Equity Office has about 100 buildings in its Southern California portfolio. About half of them are in Los Angeles, with the other half split between OC and San Diego. The company’s average tenant size in OC is about 7,000 square feet.
A lack of affordable Southern California properties also has Arden Realty Inc. looking elsewhere to expand, said Marc Jones, the company’s first vice president.
Following its sale of local office buildings to GE Commercial Finance last month, Arden is looking to start growing its portfolio. It plans to hold on to properties for about two to five years, Jones said.
The company is looking to buy properties larger than 100,000 square feet in Arizona, Nevada, and Northern California, he said. The Southern California investment climate “is pushing us into some new markets, to grow at the pace we’d like to grow at,” Jones said.
One issue that isn’t overly stressing the landlords is the mortgage industry, which takes up about 8% to 10% of the county’s office space. The sector is seeing some hard times amid rising interest rates. Subprime lenders have been particularly affected.
Orange-based ACC Capital Holdings Corp., parent of Ameriquest Mortgage Co., has put as much as 600,000 square feet of office space on the market. It’s the largest example of an OC lender trying to sublease space it rents.
“We’re seeing all (types of) tenants expand across the board, except for the mortgage industry,” Case said.
A downturn in just one sector is manageable, especially with job growth in OC so strong, he said.
Landlords at the conference noted that many of the leases made with mortgage companies were done two to four years ago, when lease rates were substantially lower than they are now.
Getting that space back now could end up being a very profitable situation, Jones said.
