Orange County office tenants may soon remember the big rent increases of 2005 and early ’06 as the good old days.
Local office rents rose nearly 12% to $2.29 per square foot in the first quarter, versus a year earlier, according to CB Richard Ellis Group Inc.
For properties in the business district around the John Wayne Airport area, the increases are even higher. Rents near the airport in Irvine are up almost 14% in the past year, to $2.49 per square foot.
Those increases aren’t an aberration. If there was any lingering doubt, OC is a landlord’s market.
“There’s no question that (average) rents will be breaking $3 soon,” said Brandon Birtcher, president of Irvine-based Birtcher Development & Investments.
Rising landlord expenses, especially land costs, and a minimal amount of new office supply are behind the increases, Birtcher said.
“Rent levels have been creeping up, and that’s only going to increase,” said Paul Marshall, Southern California division president for Opus West Corp., which has its local office in Irvine.
Buoyed by the local trends in the office market, Opus last month announced plans to build a 313,000-square-foot building at its Opus Center Irvine complex on Main Street.
With vacancy rates falling to 6%, and virtually no new office space coming on the market for another 18 months, it’s not out of the question that local rents will increase 30% during the next two years, said William Halford, chief executive of Newport Beach-based Bixby Land Co., and the former head of The Irvine Company’s office division.
For an OC tenant that’s being charged $2.75 per square foot for high-rise office space, a 30% increase would push its rent above the $3.50 mark by the start of 2008, Halford said.
The $3.50 per square foot mark is what industry watchers believe developers need to charge at their office tower projects under development to justify the cost of construction.
Companies with projects under construction or in development include Hines Interests LP, the Irvine Co., Maguire Properties Inc. and Opus West.
Developers and other landlords are likely to take their lead on pricing from the Irvine Co., the county’s largest landlord.
Last year, brokers said that the Irvine Co. was marketing its 20-40 Pacifica project at the Irvine Spectrum at rates of some $3.50 per square foot.
When many of the tower projects were being discussed a year ago, some thought the $3.50 mark was unlikely,even in the wake of the construction cost spike.
It still mainly was a tenants’ market at the time, and the thought was that most companies would balk at paying such a high rate. Now, it’s possible asking rents for those office towers in development could end up being much higher than $3.50 per square foot, brokers said.
“People have been asking if rents will come back down, but I don’t see that happening,” said Opus West’s Marshall. “I think we’ve reached a position in the market where a realignment in pricing has begun.
“Rents are starting to enter a new level,” he said. “I see (a lot of buildings) approaching $3.50.”
Tenants also should brace for more increases beyond base rent. Landlords are able to tack on as much as 20 cents per square foot for parking and other charges.
“We’re seeing little (tenant) resistance to parking charges and rent increases,” said William Flaherty, senior vice president of leasing and marketing for Maguire, during the Los Angeles-based real estate investment trust’s quarterly conference call this month.
“We’re closing the gap between existing class A space and new construction,” Flaherty said.
OC, which has a total office market of about 93 million square feet, saw about 600,000 square feet of net absorption in the first quarter.
Even with the mortgage industry giving back space, it’s possible that about 4 million square feet of space will be absorbed before any of the new towers open to tenants, Halford said.
That could push vacancy levels down, close to 2% or 3%, Halford said.
At that point, “rents could really go crazy,” he said.
The good news for tenants is that about 4 million square feet of office space is slated for construction, with much of that development starting work during the past quarter.
Most of the projects won’t be done until late 2007,at the earliest.
Work on the Irvine Co.’s 20-40 Pacifica project is under way. It’s set to total about 625,000 square feet.
The Irvine Co. also is building a 10-story, 231,178-square-foot building at Irvine Center Towers near John Wayne Airport. And it has plans for another 150,000-square-foot building at Jamboree Center along the San Diego (I-405) Freeway.
Other high-rise office developments in the works include Hines’ 261,400-square-foot building at 2211 Michelson Drive and Maguire’s 530,000-square-foot tower at the Park Place office complex in Irvine.
Office construction in OC is a relief, but Birtcher,developer of Irvine’s Lakeshore Towers and Santa Ana’s Xerox Center, among other towers,wonders how employee-friendly the new buildings will be.
“When the market has low vacancies, the tendency is not to focus on (employee) amenities,” Birtcher said. “In a highly competitive market, there are usually more features to attract tenants.
“Of the design teams that have been engaged for the new office projects, a few have excellent amenities, but some (are lacking). That disappoints me,” Birtcher said.
