The sudden implosion of the subprime mortgage industry has heightened a standoff between office tenants and landlords.
Paradoxically, both sides see the scenario playing out in their favor.
Subprime lenders, which make home loans to borrowers with imperfect credit, take up a sizable chunk of the county’s 94 million square feet of office space.
Mortgage businesses of all types have 7 million square feet of office space here, with about two-thirds of that tied to the subprime sector, according to Barry Katz, managing director of CB Richard Ellis Group Inc.’s office specialty group in Newport Beach.
“The sky isn’t falling, but there is a real issue in the market,” Katz said.
Some subprime lenders could give up space in coming months. Irvine’s New Century Financial Corp. and the Brea-based subprime arm of Santa Monica’s Fremont General Corp. could cede more than 700,000 square feet of office space in Irvine, Brea and Anaheim.
It’s not just troubled big lenders.
Smaller mortgage brokerages that brought loans to New Century and others make up a big part of the county’s mortgage tenants.
“These guys, in the 500 to 5,000 foot range, are going to get hurt as well,” Katz said.
It could be the second time in as many years that subprime lenders give back space.
Last year, close to 1 million square feet of subprime space went back on the market for sublease, much of it a result of Orange-based ACC Capital Holdings Corp.’s early 2006 decision to consolidate operations.
Now ACC, which still has about 500,000 square feet here, could give up more with layoffs last week.
Nearly all of the earlier space was absorbed and rents continued to rise in the county, though the sublease space likely restrained growth in lease rates.
More subprime space on the market this time around could bump the county’s vacancy rate,now at 7%,up by a few points, according to Katz.
Landlords and brokers representing tenants already contend the market favors their own interests. Adding in fallout from the subprime sector’s collapse only appears to harden both sides’ convictions.
Close to 4 million square feet of office space,including several high-rise towers in Irvine,is due to finish later this year. Little of the high-rise space, marketed at rates higher than what the county tenants are used to, is spoken for.
“If tenants can pause (on signing a new lease), we’re telling them to do so,” said Royce Sharf, branch manager for the Irvine office of brokerage Studley Inc., which represents tenants seeking space. “I don’t expect 2007 to shift too much, but 2008 should be a good time for tenants, and 2009 should be a great time.”
Office owners have a different take. They see the potential loss of subprime businesses as a chance to grab more stable tenants,at higher rates.
Los Angeles-based Maguire Properties Inc. told investors last week that it believes a loss of major tenant New Century Financial at its Park Place complex in Irvine would wind up benefiting the real estate investment trust.
Maguire thinks it can charge far higher rents than what the now troubled lender agreed to pay when it signed its 2005 lease for mulitple floors at a tower Maguire is building.
New Century had planned on moving to the building by September.
Maguire said last week that it thinks it can find a company to lease the top floors of its 3161 Michelson tower at rates close to $3.70 per square foot a month. New Century’s pre-lease for the tower was for just less than $3 per square foot.
At existing Park Place buildings that the subprime lender leases, Maguire thinks it could get tenants to pay 50% more than what they were charging New Century, boosting rents to more than $3 per square foot.
The end result could be less than expected leasing this year, after an already slow start to 2007, said Greg May, senior vice president for the Newport Beach-based office of Grubb & Ellis Co.
“A lot of tenants are standing back right now. They see blood in the water,” May said.
Still, some office developers may not budge much from their monthly asking rents in the $3.50 per square foot range and higher. But more concessions could be offered, such as for tenant improvement allowances, brokers said.
Developers aren’t “going to give the buildings away just to get cash flow,” Katz said.
