Real estate officials say The Irvine Company has cut lease rates for some Irvine Spectrum buildings to where they were six months ago and others are following suit amid slackened demand from technology companies.
The Irvine Co. said it was lowering asking rates for flex-tech Spectrum buildings at an open house for brokers a few weeks ago, sources say. Brokers put the cut at 40 cents to 50 cents per square foot per month.
William Halford, the Irvine Co.’s president of office properties, confirmed the company has adjusted rates but declined to comment on numbers. “What happened is in an economy moving as rapidly as the one we’ve just come out of, you move rates,” Halford said. “Once the economy moderates, you again have to reflect that.”
Other landlords say they have followed suit by cutting their own asking rates.
The Irvine Co. is “the bellwether,” said Dave Pittman, president of Acacia Real Estate Group, which since has cut rates on three flex buildings under construction at AJ West Business Park in Foothill Ranch.
“We lowered ours by 10 cents,” Pittman said, from $1.65 to $1.55 per square foot per month, triple-net. “We were just following the lead of the Irvine Co.”
For builders, flex has been an attractive alternative in recent years to conventional industrial facilities, says Robert N. Reicher, research services manager at Grubb & Ellis Co.’s Newport Beach office.
The buildings’ adaptability to office uses allows for higher rents, making them more profitable investments, Reicher said. So attractive, in fact, a lot of new flex facilities have hit the market, he said.
The technology downturn, coupled with new buildings on the market, has created more space than there are tenants to fill it, real estate officials say.
“Layoffs and cutbacks due to an inventory glut and the dot-com meltdown have caused this trickle-down effect,” said Stephen Batcheller, a senior vice president with the Anaheim office of CB Richard Ellis Services Inc.
Reicher of Grubb & Ellis said nearly 1.7 million square feet of flex-tech space sits unoccupied, a 20.8% vacancy rate. The vacancy rate has held more or less steady in the past year, though an additional 2.5 million square feet of space has come online in that time.
While a lot of new flex space has been absorbed, there’s another 1.2 million under construction and set to come online in coming months, Reicher said.
“There may not be enough people out there to absorb the current vacancy,” he said.
According to brokers who asked not to be named, the Irvine Co. lowered its flex-tech asking rates from $2.40 to $1.90 in one case. They say the cut wasn’t across the board and cited the Spectrum’s Oak Creek Business Center as well as buildings in Tustin.
“Although we’ve reduced pricing, we’re not a low-cost alternative and we haven’t undercut the market,” Halford said. “We’re still at the top of the market.”
The Irvine Co. called its adjustment of rates routine.
“It’s not like selling milk where demand is constant,” Halford said. “This is a very cyclical business.”
The Irvine Co. has lowered rates before for specific buildings. The company cited the case of the Irvine offices near John Wayne Airport that used to house the local operations of Verizon Wireless before the company relocated to the Spectrum, leaving a large block of space vacant.
The Irvine Co. says it monitors supply and demand and other indicators and adjusts rates on a monthly or quarterly basis.
Silicon Valley already has seen drastic rate reductions, observers say. The Irvine Co. called the cuts in the Spectrum moderate by comparison.
“It’s clear that the tech industry is off,” Halford said.
Flex buildings,the two-story, concrete tilt-up structures found all around the Spectrum,felt the brunt of the rate reductions. Lease rates in Newport Center and the airport area,dominated by more traditional office space,have remained stable, according to the Irvine Co. n
