By TOM ABEL
The low-rise office market in Orange County represents a diverse mix of properties from new high quality office parks to older garden-style, courtyard buildings.
The profiles of a typical low-rise office tenant include smaller professional firms such as certified public accountants, attorneys, architects, engineering firms, real estate and insurance, as well as sales operations.
However, major corporations (including headquarters uses) have found that a low-rise office campus environment can offer their employees numerous advantages over a high-rise setting. Some of the benefits include convenient, free parking, a less formal working environment with more open space and lower overall occupancy cost.
Lease rates for low-rise office space, although the most economical compared to mid-rise and high-rise space, have increased 46.9% from a year ago. The continual increase in rental rates has prompted many local entrepreneurial businesses to buy and occupy their own small building or office condominium.
A few of the advantages of owning and occupying an office building or condominium include 1) controlling occupancy costs compared to dealing with annual rental increases; 2) potential appreciation in the real estate; and 3) tax advantages to the principal of the business. Another driving force has been the ease of financing these small buildings through Small Business Administration loans. Typically, after a 10% down payment, the monthly mortgage payment and operating expenses are comparable to leasing similar quality office space.
Vacancy rates for low-rise office buildings have risen from 6.8% one year ago, to 10% in the third quarter. This was the result of construction and the recent market slowdown due to the mortgage industry correction.
Construction of low-rise office space has continued during the past 12 months with approximately 2.14 million square feet in 120 buildings being completed. Forty percent, or approximately 850,000 square feet (91 buildings) of these completions were built for sale, primarily for owner-users. Additionally, there are 55 low-rise office buildings under construction totaling approximately 676,050 square feet. Forty-nine percent of this space (50 buildings) is currently being marketed for sale to owner-users.
Orange County developers remain bullish on low-rise office projects, especially due to the ongoing interest from growing local businesses seeking to stabilize occupancy costs and to take advantage of the recent run-up in appreciation. The question now is how long will this trend continue?
Abel is a first vice president in the Anaheim office of CB Richard Ellis Group Inc. Data and analysis provided by CB Richard Ellis Research.
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