By JUSTIN HILL
Lease rates in Orange County’s 118 high-rise office buildings jumped 13 cents per square foot during the first quarter to $2.63 per square foot per month, full service gross.
High-rise office buildings are seeing record lease rates, with more gains in the forecast.
Lease rates of more than $3.50 per square foot per month are expected to be common for high-rises under development by The Irvine Company, Hines Interests LP, Opus West Corp. and Maguire Properties Inc.
High construction costs have been a major driver behind rising lease rates for projects under development.
Along with rising rents, vacancy rates also were on the upswing in the first quarter, rising from 6% in the fourth quarter to 6.6% at the end of the first quarter.
It’s the first time since the fourth quarter of 2002 that vacancy rates have increased from quarter to quarter. Vacancy in the first quarter did improve from 8.7% a year earlier.
A major contributor to rising vacancy is that tenants are looking to lower cost alternatives to expensive high-rise office space.
Tenants are focusing on mid-rise office projects that are on average 30 cents to 40 cents less per square foot than their high-rise competition but still offer a professional work environment.
Vacancy for mid-rise office space fell to a record-low of 5.2% in OC during the first quarter.
Despite the increasing lease rates, high-rise office buildings still are seeing quite a bit of leasing activity in OC.
There was 145,861 square feet of high-rise office space leased in the first quarter. More than 76,000 square feet of the total was leased in Central County.
One high-rise seeing a lot of activity was Xerox Centre in Santa Ana. The building, which was bought by WCB Properties earlier this year, saw five leases during the first quarter, with occupancy rising to 90% from 80% a year ago.
What should tenants do now that lease rates are rising and vacancy is low?
Many tenants are considering early lease renewals, searching for sublease space or already improved office space to help hedge against the rising lease rates.
More sublease space is becoming available as mortgage companies give up space in high-rise buildings to manage expenses amid rising interest rates.
At the end of the first quarter, there was more than 563,000 square feet of space available for sublease in OC high-rises. That’s slightly less than 20% of all the available space for lease in high-rises.
High-rise office space is continuing to become more expensive across OC. Whether demand continues for leasing space in this type of property will be up to tenants.
Hill is an associate in the Anaheim office of CB Richard Ellis Group Inc.
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