By SIMON DILLON
Occupancy is up, vacancy is down and lease rates are spiking in many class A high-rise buildings in the greater John Wayne Airport area.
Effective lease rates,or the average rental rate a tenant pays over the occupancy term including free rent,for the airport area’s class A high-rises are up about 25% in the past year.
Meanwhile, total vacancy for the high-rise buildings has dropped from 15.3% to 11.2% in the past year.
The change is even larger for direct vacancy, which doesn’t include sublease space. Direct vacancy has dropped about 34% to 9%.
Oddly, average asking rates only have increased by 3.4%, or seven cents per square foot per month. Typically before a rental rate spike, the first thing to go is landlord concessions, such as a generous tenant improvement allowance, move allowances and free rent. Rent hikes come later.
Last year, for example, landlords who were asking $2.30 per square foot actually were cutting deals with $2 effective lease rates. For low vacancy buildings, a $2.30 asking rate now means a $2.30 first year rate subject to annual increases, which reflects much higher effective rental rates.
We now are well into the next phase, which is when the rates start inching up in select properties. What is next? Assuming no unforeseen change in the economy, craziness follows.
Landlords will push rates up in a frenzy with the next deal setting a new high for a particular project. This will continue until market variables change.
Quality office development sites, which are in limited supply, will start to pre-lease and then begin construction, which will add to the supply and ease demand. (There will be more options for tenants, and therefore less pressure, which creates a more competitive environment for landlords and balances the market.)
It is important to note that pre-lease deals will need to be about 20% higher compared to current rates in order to make sense.
Another factor that may come into play is if Orange County’s mortgage sector takes a hit. Sublease opportunities and default space could create more options for tenants if that happens.
Dillon is a vice president in the Newport Beach office of CB Richard Ellis Group Inc.
