Big business might hold the upper hand in many aspects of the national economy, but smaller-sized companies call the shots in Orange County’s office market these days.
OC’s office market, which totals about 100 million square feet of space, now counts a vacancy rate of about 17%, according to a survey of local brokerages’ third-quarter market reports.
Most data from area brokerages show va-cancy rates falling by a half a percentage point or less from the past quarter, and by about two percentage points over the past year.
Vacancy rates higher than 10% are generally considered to be a sign of a market favorable to tenants rather than landlords.
Vacancy rates here have topped 10% since late 2007.
For large blocks of space, however, there’s said to be a decidedly slimmer amount available than a year or two ago. That essentially makes it a landlord’s market for that type of office space, according to area brokers.
It’s created a tale of two tenant types.
For office space 50,000 square feet and over, there’s been a little bit of a price premium recently for the best buildings, said Kurt Strasmann, senior managing director for the OC operations of CBRE Group Inc.
A typical floor in an area high-rise office runs about 25,000 square feet.
Monthly rents on average run about $2 per square foot—and about $2.10 for high-rises—but tenants eyeing two or more floors in one of the area’s better offices might be expected to pay 5% to 10% more, according to a survey of brokers.
There’s no such premium for smaller tenants, which make up the bulk of OC’s tenant base.
“For bread-and-butter deals, 3,000 to 10,000 square feet, there’s an amazing amount of availability, and those (landlords) are more challenged,” Strasmann said.
Brokers who exclusively represent tenants say the two-tiered dynamic has intensified in the second half of the year.
“For those smaller (companies) that can commit, long term, for a full floor or less, the world is theirs,” said Randall Parker, president of Travers Realty Corp., which has local offices in Newport Beach.
Long-Term Challenge
Getting smaller companies to commit to longer leases amid the current economic climate presents a challenge to property owners.
“Without being able to predict what will happen from one month to the next, many businesses are refraining from pursuing growth strategies, such as hiring more employees and renting more office space,” noted the third-quarter market report from the Irvine office of brokerage Jones Lang LaSalle Inc.
“Landlords recognize this, and they’re being aggressive—it’s becoming a ‘capture-everybody-at-all-costs,’ mentality,” Travers’ Parker said. “The situation changes a little for larger companies; there’s a scarcity of product. If you need three or four floors, there’s only a handful of opportunities.”
A number of larger-sized leases inked over the past quarter took prime office spots off the market for other big tenants.
CoreLogic
Santa Ana-based data and analytics company CoreLogic Inc. signed a lease for 170,000 square feet at the recently built 40 Pacifica office tower in the Irvine Spectrum.
It plans to move its headquarters to the building next year, after the building’s main occupant, the Federal Deposit Insurance Corp., moves out.
Near John Wayne Airport, Irvine-based Western Digital Corp. added nearly 104,000 square feet of space to its existing lease at the Park Place office campus.
It now leases about 470,000 square feet at Park Place, where it began relocating from Lake Forest last year (see related story, page 3).
Among higher-end tenants announcing an office move last quarter, law firm McDer-mott Will & Emery LLP reportedly inked a 45,500-square-foot lease at the Jamboree Center office complex just off the San Diego (405) Freeway.
The firm, which counts about 30 local lawyers, will be moving from the Lakeshore Towers office complex, also in the airport area.
Other area tenants said to be in the market for 100,000 square feet or more office space include Blizzard Entertainment Inc. in Irvine; Mountain View-based Google Inc., and Toshiba America Inc. in Irvine, the U.S. arm of parent Toshiba Corp. in Tokyo, according to Jones Lang LaSalle’s local office.
Breather
Even with the larger leases signed of late, transaction volume took a bit of a breather in the third quarter.
Leasing activity for the quarter totaled 1.7 million square feet, down about 9% from a quarter ago.
That’s about 8% below year-ago levels, according to data from the Irvine office of Colliers International.
Net absorption increased for the fifth straight quarter, according to Colliers’ data, which reported positive absorption of 562,800 square feet.
CBRE Group’s third-quarter data also show positive absorption, albeit at a much-lower amount of nearly 60,000 square feet.
90-Day View
Local executives are expected to keep a close eye on leasing activity going into 2012.
“The next 90 days should be a pretty telling story about how strong the market is performing,” CBRE’s Strasmann said.
