Real Estate Watch: Research and Development Space
Activity Picking Up in South OC
By STEPHEN WAGNER
The R & D; market in South Orange County is beginning to show more activity in the first quarter. The Events of Sept. 11, a lull in the economy and the holidays all dragged down the market in general. However, since January we have seen the R & D; market pick up, with investors, owner-users, and tenants all contributing to the turnaround.
While we are not experiencing the rapid growth of 1998-2000, the R & D; market in South OC is outperforming other sectors of commercial real estate. There are several reasons for this. The majority of the buildings are smaller than 30,000 square feet, so most users are flexible enough to move if the right economics are in place. There are 1,031 exchange buyers who must place money, and many prefer the security of net leased R & D; buildings for their investments. Interest rates are at historic lows and many owner-users are able spend the same amount or less per month buying as opposed to leasing, not to mention the added benefit of tax deductions and appreciation. The new developments in South Orange County are being marketed primarily to these owner-users, with sale prices fairly close to the asking prices.
Tenants also are adding to the increase in activity. Many signed leases in the mid to late ’90s at rates that were higher than today. Typical lease terms are three to five years, so there is significant turnover, with companies re-evaluating their space needs. The average lease rate in South Orange County for R & D; buildings smaller than 30,000 square feet is 91 cents per square foot per month, triple-net. That is down from where many of these tenants signed in the late ’90s. Many companies are opting to renew with their current landlords and trying to secure more favorable terms. The majority of the landlords are responding by being competitive in their renewal rates to keep their existing tenants. The balance of the activity is companies growing into more space, companies downsizing or companies relocating to the area.
While the amount of land available for development is diminishing, we foresee the R & D; market in South Orange County continuing to remain healthy in the short-term. Our long-term outlook remains bullish, as more companies make South Orange County their home.
Stephen Wagner is a sales associate in the Newport Beach office of CB Richard Ellis.
