Low-rise office vacancy rates are showing signs of improvement.
Vacancy declined in the first quarter to 13.5% from the fourth quarter’s 15.5%.
Tenants are clearly more confident about the future of their businesses—especially large, name-brand companies. The number of large active tenants in the market is the most I have seen in a long time.
That marks a turnaround for recent quarters.
Early on in the recession, we had a flight to less-expensive, low-rise office space as corporations wanted to send a clear message to shareholders that said they are making practical decisions.
Lease rates had been falling so quickly that corporate decision makers were scared to sign long-term leases into a declining market. No one wants to look back on a deal and feel like they goofed. Now it seems like the “embarrassment factor” is gone.
Tenants are being lured to midrise and high-rise space by attractive lease rates. Pasadena-based Tetra Tech Inc. recently consolidated three low-rise locations into about 60,000 square feet of space at a new building within Irvine’s Quintana office campus.
Part of the attractiveness of that deal included free parking with the lease, which traditionally has been a barrier for low-rise tenants moving to high-rises.
It is important to note that not all low-rise office buildings are seeing a rise in tenants. Typically, low-rise buildings have a few large tenants and many small tenants to diversify risk. But those that cater to large tenants run a greater risk if one large space becomes vacant or a big tenant stops paying rent.
Well-heeled landlords have a distinct advantage. They effectively have less real competition and are able to send a signal of certainty and stability to prospective tenants. Minnesota’s Scantron Corp. recently signed a lease for about 26,000 square feet at Orange County Business Centre, a 500,000-square-foot building that has no debt on it.
Those buildings that have more debt tied might be required to go to their lenders or investors for approval or additional cash in order to fund tenant improvements and commissions.
There are some “zombie” buildings, which are unable to do any deals because they are in receivership or simply out of cash.
Dillon is a first vice president in the Newport Beach office of CB Richard Ellis Group Inc.
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