Lease rates continue to seek a bottom with vacancy rates still relatively high in Orange County’s high-rise office market, which is largely concentrated in the airport area, Irvine Spectrum and Central County submarkets.
Asking rates, now averaging $2.16 per rental square foot, appear to be getting closer to the bottom. The market remains tentative with a 21.3% high-rise vacancy rate.
High-rise landlords are offering attractive concessions, including higher move allow-ances, aggressive tenant improvements and initial free rent for lengths of time based on lease terms and tenants. None of these concessions are new, but current offers remain aggressive.
Some landlords are pulling out the stops by offering one to two years of free parking as an added incentive. A recent lease agreement with a large national tenant included five years of free parking.
The ability to adjust rents and make other concessions often depends on a landlord’s debt and capital structure.
A tenant should approach negotiations with the help of an adviser who understands how to factor a landlord’s financial footing.
Many high-rise landlords see a brighter picture in two years and are hesitant to lock in market rents for a longer period of time. Instead, for leases where limited capital improvements are required, landlords prefer to concentrate most concessions into the first and second years, keep the lease term shorter, and then renew at higher rates.
Tenants, on the other hand, want to capitalize on the current tenant-friendly environment and lock in the low rates available today at longer terms.
Expect this push-pull to continue in the high-rise office sector until the market returns to a more stable vacancy rate.
Stickel is a vice president in the Newport Beach office of CB Richard Ellis Group Inc. Data and analysis provided by CBRE Research.
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