Real Estate Watch: High-Rise Office Market
High-Rise Office Market: The Best Value in Town?
By SIMON DILLON
Landmark buildings made with the finest construction materials, dramatic lobbies, high-speed elevators, breathtaking views and covered parking areas,that’s the high-rise image.
Tenant profiles for these buildings typically are a high profile, high-end professional, or a Fortune 500, household name company.
But during the dotcom boom of the late 90s it became somewhat “in vogue” to go from vertical to horizontal. Some typical high-rise, high-profile tenants opted for one and two-story tilt-up buildings instead of high-rise.
These tenants usually had some sort of tie-in with the tech sector of the economy. This trend has obviously slowed.
There still is some migration out of high-rise buildings, but now it’s primarily larger space users with space efficiency issues. The typical high-rise floor plate is about 22,000 square feet while many tilt-up buildings can accommodate in excess of 40,000 square feet and in some cases hundreds of thousands of square feet on one floor.
These factors coupled with the current depressed office market have led to large reductions in asking lease rents. The average asking lease rate in the high-rise category is down about 10% in the first quarter compared to the same time last year.
Moreover, effective rents “where the deals are getting done” are down even more.
Two years ago landlords were able to demand starting rents at or very close to the asking rates with annual increases of up to 5% in some cases. It was not uncommon for tenants to get into a bidding war over space.
Today, there’s much more flexibility in rental rates. Now “motivated” landlords find themselves in bidding wars to sign quality tenants. The term “asking lease rate” has taken on new meaning. Now it is not as closely related to the rate the tenant pays in the first year of the lease as it used to be. Also, many deals with credit-worthy tenants involve other concessions, such as free rent.
It’s a good time to be looking for high-rise office space. Tenants will still have to pay a premium for high-rise office space (especially when parking charges are considered), but the premium is much lower than it has been for a long time. Many low-rise tenants moved upscale during the last real estate cycle, and that is expected to happen again this time around.
Because of its central location, the John Wayne Airport/Coastal area is home to more high-rise office buildings than the rest of the county combined. The airport area’s high-rise sector will be an economic barometer for the rest of the county and other building types, which will follow the airport’s high-rise sector at their own rates and subject to their own unique market conditions.
Many “trophy” high-rise buildings are expected to change hands in the county.
Recently, American Realty Advisors closed escrow on 4100 Newport Plaza, (now known as Newport Corporate Tower) for more than $40 million. American, along with many other deep pocket investors, has an appetite for this type of asset in Orange County.
Dillon is a vice president in the Newport Beach office of CB Richard Ellis.
