Real Estate Watch: High-Rise Office Market
High-Rise Prices Fall Near Airport, South OC
By SIMON DILLON
High-rise office space is on sale in the John Wayne Airport area and South Orange County.
In comparison, vacancy and pricing remain pretty consistent in the other OC high-rise office markets. Drastic price reductions near John Wayne Airport and South County are due to supply and demand dynamics.
A large amount of the vacancy is found in large blocks of space. There are many choices for full-floor users.
Hungry landlords are being forced to compete with each other for the few with “large” requirements, which is driving rental rates down.
In contrast, activity in the “smaller” requirement segment is very warm.
In general, it’s a great time to be renegotiating a renewal or considering a corporate relocation.
We have completed nine lease transactions for space less than 5,000 square feet in the past eight months at Newport Corporate Tower (a high-rise office building at 4100 Newport Place).
This market activity is prompting landlords to consider ways to break up larger blocks of space to facilitate smaller deals.
Smaller deals provide landlords with more potential to diversify risk and increase rental rates. But breaking up larger space can be costly.
Some landlords are “Band-Aiding” by completing short-term leases.
These deals usually have low tenant improvement terms. For instance, a one- or two-year lease with professional carpet cleaning and touch-up painting of the suite only.
This enables tenants to get a cheap short-term deal, while owners get quick cash flow without tying up space with low lease rates for when the market turns.
Another strategy is “front loading” the transactions with concessions.
A deal may be based upon the owner’s performa, which is typically above market these days. The effective rental rate can be bought down with free rent or an above market tenant improvement package or both. This can be a win-win situation for landlords and tenants.
The tenant gets the benefit of upfront cash-flow relief in the form of free rent, while the landlord removes risk by signing leases, and achieves desired performa rents.
Dillon is a vice president in CB Richard Ellis’ Newport Beach office.
