The end of first quarter brought a sense of optimism in the high-rise office market.
By most accounts, tenants’ attitudes are more positive than in 2009, yet still reserved. Larger tenants are adapting to the economy by evaluating space they already have, while smaller tenants are looking to expand or lock in lower lease rates.
By no means are we back on track, but the feeling of many high-rise office tenants is that the worst is behind them.
So how can this renewed sense of optimism be true when most first quarter office market reports from the major brokerage houses are reporting negative absorption, lower asking rates and higher unemployment?
It is accurate to say rates are still depressed and tenants are shrinking. The average asking lease rate for high-rise office space decreased to $2.37 per square foot from $2.48 and absorption was negative 399,876 square feet during the first quarter.
Unemployment increased slightly to 9.7% from 9.6% in the first quarter.
On the Hunt
The still shaky economy is pushing companies to look at their office space as a place to save money—which means that some are on the hunt for new space.
When evaluating office space needs, large national organizations with multiple offices typically look to consolidate into surplus space within their leased or owned portfolio. This recently happened in Anaheim with Hewlett-Packard Co. relocating to office space in Cerritos that was not fully used.
If consolidation is not an option, larger tenants typically will downsize. When this occurs, it is often easier for the tenant to relocate to a building that has been modified to fit its needs than to live through construction. This forces the tenant to enter the market and give other landlords the opportunity to compete for its business. Although the reduction in size contributes to negative absorption, the tenant’s relocation leads to increased activity and opportunity in the market.
On the other end of the spectrum, Orange County is filled with entrepreneurial businesses. These tenants have endured turbulent times, but they now are seeing more stability.
In the past two years, tenants were choosing flexibility with shorter leases instead of locking in low lease rates. The result was an increase in shorter lease terms. Today, as those short-term leases expire, tenants are more willing to make longer commitments in the form of three-to five-year leases. And landlords are eager to accommodate them with creative concessions.
As the economy continues to strengthen, tenants will continue to make office space plans that are tailored less toward survival and geared more toward growth. Landlords will try to secure tenants and structure lease terms that will stagger lease expirations and position themselves for tenant growth.
OC’s office tenant base is adaptive and showing signs of confidence. Only after absorption and growth occur will the market report reflect positive results.
In the meantime, the high-rise office market has seen an increase in activity with increasingly optimistic tenants with more defined space plans, but it has not yet seen any material growth.
White is a first vice president in the Anaheim office of CB Richard Ellis Group Inc.
The Real Estate Watch Chart
Net Absorption, Rates, etc. is provided in a Adobe Reader .pdf print-friendly file.
