Real Estate Watch: High-Rise Space
Tenants Rule High-Rise Office Market
By SIMON DILLON
High-rise office space still is a bargain in Orange County, according to third-quarter statistics.
Vacancy rates for high-rise space rose to 15.8% in the quarter, up from 12.1% a year ago.
Landlords have made drastic moves to stay competitive and avoid even greater vacancies. Asking lease rates have dropped by almost 10% in the past year and the difference in pricing between high-rise and the alternatives has narrowed. Tenants in low- or mid-rise space may be able to consider high-rise space in some cases.
The main contributors to higher vacancy and lower lease rates: high-rise construction, sublease space, bankruptcies and the sluggish economy.
Despite the declining office market, many developers had already started construction on projects that they could not, or were unwilling to, stop.
Sublease space still is prevalent and in some cases provides landlords with direct competition within their own building. Bankruptcies and cost-cutting businesses are adding to landlord problems.
From a tenant’s perspective, it would seem logical to lock in a low rate for as long as possible. But tenants are cautious in the face of a weak economy and their own uncertain futures. Many tenants are opting for shorter, flexible lease terms, which landlords will accommodate, provided only minor modifications are needed.
Some landlords currently are refusing to write lease terms beyond five years at today’s low rates.
Today’s high-rise office lease typically is “front loaded” with concessions. They have a graduated rental structure with fixed annual increases of 2.5% to 4% and a free rent component, which is used to bring down the effective rental rate.
This provides a win-win situation for most parties. The landlord gets the benefit of a decent rental structure while sacrificing cash flow. The tenant benefits from a big amount of free rent, which brings down the effective rate. And tenants really benefit when the time value of money is factored in.
Dillon is a vice president in CB Richard Ellis Services Inc.’s Newport Beach office.
