Orange County’s office market has weathered some bumps this year, including a giveback of space by mortgage companies and the chill of a slowing housing market.
Now comes the interesting part.
There’s close to 5 million square feet of office space going up in OC. Of that, more than half, 2.8 million square feet,or roughly 100 floors,is unspoken for, according to the Irvine office of Studley Inc.
Office towers under construction include four high-rises near John Wayne Airport and two in the Irvine Spectrum.
Most of the buildings are set to finish next year, starting in the spring. Houston-based Hines Interests LP should have the first of the towers done in May with its 2211 Michelson Drive project.
Who will be taking all that office space, and how much will they be paying?
That’s the big parlor game being played among local real estate watchers.
For big tenants looking for space, “There’s a lot of waiting and watching going on,” said Greg May, senior vice president for the Newport Beach-based office of commercial brokerage Grubb & Ellis Co.
A few local and Los Angeles-based tenants are said to be near deals for space at Hines’ tower. No deals for the rest of the available space have been announced.
“Tenants want to see” the space before committing to a lease, said William Flaherty, senior vice president of leasing and marketing for Los Angeles-based Maguire Properties Inc., which is building the largest of the towers now going up.
Maguire scored a coup when it landed two tenants,Irvine-based New Century Financial Corp. and the Irvine office of Los Angeles-based law firm Gibson, Dunn & Crutcher LLP,for nearly half of its 19-story building at Park Place before finishing construction.
Those deals were struck in early 2005. Maguire still is looking to fill in the remaining 260,000 square feet of the 530,000-square-foot tower.
Other developers are looking to land big tenants to take up multiple floors at their towers. All are looking to charge rents well above the county average to offset high land and construction costs.
The Irvine Company is marketing space at 20-40 Pacifica,its twin towers going up in the Irvine Spectrum,at monthly rates starting at $3.60 per square foot a month, and as high as $4.30 per square foot. Those upper-end rates are on par with the Irvine Co.’s Newport Center, now the most expensive office market in the county.
Other developers say rents at their projects should be similar.
Some tenants and brokers, meanwhile, are betting that the addition of more office space could temper rents after years of double-digit increases.
“The dynamics will be changing next year, with the new space,” said Barry Gail, senior director for the Irvine office of Cushman & Wakefield Inc.
Whether the changes result in a market that favors landlords or tenants “likely depends on whose camp you’re in,” Gail said.
The majority of leases for office space as of late has been for smaller tenants, said May of Grubb & Ellis. That appears unlikely to change in the near term.
“The amount of larger tenants looking for space right now and in the not too distant future is not very significant,” May said.
A lot of larger tenants recently have renewed leases, sometimes adding some space to their existing offices.
“Most of these firms are locked in,” May said.
To land a tenant willing to take multiple floors of a new building could take some aggressive moves on the part of developers, said Kevin Bender, senior vice president at the Newport Beach office of CB Richard Ellis Group Inc.
“2007 is shaping up to potentially see a lot of volatility. There’s going to be a lot of competition” for tenants, Bender said.
As it stands now, OC’s office market is strong.
The average monthly asking rate was $2.48 in the third quarter, according to the Irvine office of Voit Commercial Brokerage LP.
That’s a record high and is up 9.7% from last year’s third quarter rate of $2.26.
Meanwhile, vacancy rates have dropped from 7.9% in the second quarter to 7.5% in the third, despite the impact of nearly 1 million square feet of sublease space being put on the market, primarily from the subprime mortgage industry that largely calls OC home.
The market “is still reasonably robust,” Maguire’s Flaherty said. “The market may be slowing a bit, but that’s understandable.”
For now things are in landlords’ favor with “only modest concessions being offered,” he said.
“For landlords, it’s still a very strong market,” Flaherty said.
