By JUSTIN HILL
Change is in the air for the high-rise office market in Orange County.
After a three-year run of steady growth, the OC high-rise market showed signs of stalling during the second quarter.
It looks as if high-rise buildings are starting to see the effects of a contracting mortgage industry and a down quarter for OC’s labor force.
Despite these recent changes in the market, high rise lease rates continued to hold strong in the second quarter, averaging more than $2.60 per square foot per month, full service.
There was a slight drop in the average lease rate during the second quarter,a 1-cent decline to $2.62 per square foot versus $2.63 in the prior quarter. Although it wasn’t a big move, the drop does show some uncertainty in the market.
It was the first time since the fourth quarter of 2003 that the average asking lease rate has declined from one quarter to the next in the high-rise market. But it’s important to note that the second-quarter lease rate was 18 cents per square foot higher than a year ago.
The second-quarter vacancy rate also moved in a direction that hasn’t been seen in quite a while,up 16.5% to 7.7%.
Blame the slowdown in the mortgage industry for the vacancy increase. Lenders put nearly 800,000 square feet of space up for sublease in the second quarter.
A large amount of the mortgage sublease space is in high-rise buildings.
There was 274,762 square feet of negative absorption in the quarter. With more space becoming available in the market than space being leased, landlords are likely to offer more concessions than in the past to prospective tenants. Tenants, meanwhile, will have more locations to choose from.
Although construction costs remain high and strong competition for land by residential developers still exists, there are several high-rise office buildings being built across the county.
The demand and prices for high-rise space still are lucrative enough for The Irvine Company, Hines Interests LP, Maguire Properties Inc. and Opus West Corp. to aggressively move forward with five towers under construction.
So what are tenants and landlords to do in this dynamic market?
Tenants, for the first time in quite a while, will be able to negotiate with landlords on lease terms rather than just accepting their terms.
Landlords will be more likely to keep current tenants happy while enticing new tenants with concessions that haven’t been seen for some time.
Hill is an associate in the Anaheim office of CB Richard Ellis Group Inc.
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