The economy is humming, real estate is booming and vacancy levels are low. It’s a landlord’s market, a welcome change for many real estate owners after the brutal recession of the early 1990s. But how long will the good times last for OC landlords? The Business Journal’s Nidal Ibrahim asked a wide range of local real estate players and observers for their take on that question.
How long will landlords have the upper hand?
Richard G. Sim
Senior vice president
The Irvine Co.
The marketplace decides that question and I think it’s prudent to have supply and demand in balance. That way, the developer gets to make a reasonable profit and the tenant gets a fair price.
What happened in 1990 through 1995 is that almost all of the developers here in Orange County went broke and as a result rents collapsed. But also, in some areas, service (provided by landlords) collapsed because no one was making any money.
It’s healthy when markets are in balance because then developers can get a fair profit and deliver a good product to the tenant.
Greg J. Knapp
President
Brookhollow Group
I see the fact that we’re stabilized in the market and I think there will be more equilibrium with the tenants having as much clout as the landlords. Enough product is coming on the market and there’s enough change in tenant demand that there will be more equilibrium soon. I just think it will not be as hot as it is and there will be more stability and equilibrium between landlords and users.
Kim Snyder
Managing director
Insignia/ESG Inc.
I would say that certainly I think for the next 12 to 18 months there will be a landlord’s market, primarily as a function of continued economic growth, albeit at a lesser rate. To the extent that a landlord can deliver space, he can command greater rents than he’s been able to command since I’ve been in the business. There’s a very limited supply of new space and that puts pressure on the tenant rather than on the landlords. But the landlord pays dearly to create the supply right now, and it’s hard to come by.
Kurt Whaley
Vice president
S.J. Amoroso Construction Co.
I would say another 24 months because the Orange County upturn in the economy has lagged behind the rest of the country. There’s some catching up we’re doing at this point. As an example, in the late 1980s, when the rest of the country was in recession, Orange County was booming. So I think Orange County’s business cycle is a little different than some of the other parts in the country.
Pat Murphy
Managing partner
Gale & Wentworth California LLC
It all gets down to supply and demand, as it always does. As long as there is a lot of demand for great locations and limited supply, that’s when landlords will have some advantage. When (the situation) changes, that will change also.
A lot of it has to do with the national economy. Looking forward, we have a pretty good 12- to 24-month window of steady employment and growth in Orange County.
R. Scott Bell
ICI Development Co.
There is going to be a day when it will be a tenant’s market (again), but I don’t see that for two to three years in retail in Orange County. There’s just not enough new quality product (being built). The demand for new retail space right now exceeds what’s available. There’s demand for quality, state-of-the-art retail, and it’s hard to find a location to put that quality, state-of-the-art retail. There’s growth (opportunities) for first-class, state-of-the-art retail centers in Orange County. Because of that, it will (continue to) be a landlord’s market. The opportunities to develop are few and far between.
Stephen Jones
President
Snyder Langston
I think (landlords will have the upper hand) for quite a while. The reason for that is that there’s not a lot of appetite either on the developer’s or in- vestor’s side to overbuild. So as long as there’s strength in the economy, then by definition we’ll have low vacancy, at least in this area. I would be less optimistic of that in Northern California, where rental rates are three or four times what they are here because of such huge demand.
Rusty Turner
President,
Turner Development Co.
Landlords will have the upper hand for another three years or so. I don’t know what will turn it (around), but there are clearly too many great fundamentals and too many people who want to be in this area. We see too much expansion.
Rick Putnam
Senior vice president, principal
Trammell Crow Co.
As long as the local economy is driven either by the national economy or by the recovery in foreign markets, there will not be enough product to catch up to tenant demand. Landlords will continue to have the upper hand for another two to three years at a minimum.
Bob Smith
Broker
CB Richard Ellis
That’s really an assumption of supply and demand. Until (developers) build too much space,which they are not building,and as long as we have positive absorption and the economy remains strong, landlords will continue to have the upper hand.
We have a strong economy. There’s not too much product being built and we have tenants moving in from other locations because of the quality of living here in Orange County.
Dewain Campbell
Camco Pacific Construction Company
Landlords will continue to have the upper hand as long as The Irvine Co. continues to control such a large portion of the upscale office market in Orange County. The market moves based upon moves made by The Irvine Co. All other major landlords follow, very quickly, the rate changes at The Irvine Co. It is very unusual to have a major market where one landlord has such a significant control of the marketplace.
I also believe the commercial construction market in Orange County will remain strong. Commercial construction tends to follow the housing market into and out of cycles. As long as housing is leading, the commercial construction market will follow. Orange County is in a strong position,as all of Southern California is. People want to live here for economic opportunity, climate and ethnic diversity.
Looking ahead, I don’t predict any significant changes in the pace of commercial construction over the next several years. The economy is strong and steady and should continue through 2005. For the construction industry, it is important,especially in a healthy economy,to stay within your company’s abilities. We could easily overbook construction projects and then not be able to properly manage such work. We are only taking on projects with solid financial owners.
Qualified construction employees are slowly returning and/or coming to Orange County from other areas as the economies slow in other areas outside the market. Our biggest concern today is to keep and maintain a quality workforce.
Biff Smith
Collins Commercial
Developers will have the upper hand at least through this year because the accelerated increase in land values and the complications involved in the entitlement process are going to limit the supply side for new space.
Landlords are going to want the upper hand because they want some payback from the beating they took in the early 1990s, and they will probably be more intransigent than they would be (otherwise). As a group, they will remain that way, and therefore you won’t see any eroding of rental rates.
Russell Parker
Principal
Parker Properties
Based on the legal and business terms we’re seeing from small and large tenants these days, we have observed that most users and their brokers are very savvy and have specific requirements. We have found that if you give the users what they want, the rental rates are not usually a major issue or deal breaker. Other factors are on-site and locational features many companies consider a must in order to attract and retain qualified employees. These amenities figure into lease negotiations, benefiting the user as well as the developer over the long term.
In the near future, based on the amount of tenant demand for strategically located office projects, and the current factors limiting the future supply of office space in Orange County, the rents should slowly and steadily increase over the next three to four years, barring a major economy downturn.
Brandon Birtcher
Co-chairman, chief development officer
Birtcher Real Estate Group
Starting around 1995 and continuing through about 1998, the office market was catching up to tenant demand within Orange County. Landlords were trying to meet the pent-up demand of the office market. It wasn’t until this past year that annual absorptions have been approximating annual development of new office product, maintaining a strong equilibrium.
Two things will keep us in this equilibrium: The first is if interest rates set by the Federal Reserve will help keep the economy in check, ultimately preventing overbuilding and keeping the real estate market in a continued state of balance. The second thing is,because of the increasing cost of capital within the past year and a half,rents will increase. This, combined with continuing scarcity of developable land in Orange County, will result in the continuance of a tight office market. We won’t see an oversupply of space, free rents or other additional concessions given to tenants. They will pay the fair market cost of occupancy.
Steve Layton
Layton-Belling & Associates.
We have been seeing a strong equilibrium of supply and demand for office space within Orange County. As a landlord, I have never seen the market so balanced in this region and expect this to continue for at least another year or two.
With that said, even though the market is good, we are continuing to make deals that are win-win for both the landlord and the tenant. We are seeking to make lease transactions that are meeting the needs specific to the tenant that also make sense to the company and our financial partners,this is especially true in the case of younger, high-tech companies with little or no credit history.
Louis Tomaselli
Voit Commercial Brokerage
(Landlords will have the upper hand) for at least a year or two when an actual business slow down occurs. The driving force behind the market strength is the lack of industrial land and limited amount of office land.
Industrial vacancy rates are at a 10-year low with continued strong tenant demand in all size ranges, from multi-tenant to big distribution/manufacturing buildings of upwards of 400,000 square feet. Very little new product is coming on line; and what does come available seems to be leased at or just after completion of construction. The normal turnover vacancy that occurs in the existing base of industrial space is not enough to satisfy the growing demand from companies expanding within Orange County and new companies moving to Orange County.
In office space, The Irvine Co. controls the majority of the office land in South County. Because it is too valuable to build industrial space, there will be no new industrial in South County, thus further strengthening landlords’ positions on existing building rents for some time to come.
With regard to office space, most of the flex office and high-rise that has been built has leased in record time. The Irvine Co. is responsible enough not to overbuild so as to keep the supply just enough to meet demand and thus keep pricing up.
