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Orange County Rental Rates Keep Climbing. Are Landlords Asking Too Much?

By Tucker Hughes

This year has seen an enormous uptick in the velocity of Class A office building sales all around the county. What’s the true effect of all this activity on tenants beyond the obvious result of having a new owner? Surprisingly, the answer is a considerable increase in rental rates that may appear to come out of nowhere, often times with virtually zero justification.

For example, when the ten-story office tower of 1301 Dove Street in Newport Beach was purchased by Prudential earlier this year, asking rents shot up from $2.55 per square foot to $3.15. It’s not just happening with closed sales though; rates are also being raised in anticipation of future sales.

MetroCenter, which is comprised of three different 12-story buildings in Costa Mesa, is expected to be hitting the market to be sold in the near future. Asking rents in this project have gone from $2.25 per square foot to $2.65 over a very short period of time. The current trend would indicate further rent growth as a buyer is identified.

New landlords aren’t in the business of losing money, and they aren’t going to lock in long-term rental rates that create negative returns for their shareholders in an appreciating market. The better alternative for them is to wait and hope that even the most ridiculous of rents are achieved over time as they take advantage of the strong tailwinds presently gusting on their backs.

Unfortunately for many of these past and future buyers, in the short-term they will find themselves as the most expensive game in town on a value adjusted basis. This means hemorrhaging tenants from their buildings and, with that, their occupancy numbers. Unless tenants are ready to step up and pay inflated rates, many find themselves with an economic incentive to relocate, which renders even the strongest desire to renew incomprehensible.

Image via AxisOC.com.

Some projects coming online have taken a “value added” approach to garner higher rental rates. Lincoln Property Company’s creative office repositioning of Axis is one of the first of its kind in Anaheim. The project will boast an onsite brewery, bike shop, and conference center, and many of the tenant spaces will feature glass roll-up garage doors, exposed ceilings, and progressive buildouts in an attempt to attract tenants focused heavily on their corporate culture. Their all-in rents will be a little less than $2.50 per square foot, and project’s activity is solid.

As I mentioned in my last quarterly update, Hines and PIMCO have purchased the Quintana project on the corner of Main and Von Karman in Irvine. They have made quick progress in determining their plans for the asset, having recently announced a new name of “Intersect.” This project is also targeting creative office users and will work to create a Playa Vista-like vibe through substantial project renovations, albeit in a more sterile environment.

Image via 200SpectrumCenter.com.

Irvine Company’s office space pipeline in Irvine Spectrum continues to grow after an already successful start of their pre-leasing rounds at 200 Spectrum Center Drive, the region’s newest high-rise office tower. The success of the project has largely been fueled by the real estate needs of three different large and recognizable companies, which in aggregate are close to reaching terms to fill the entire bottom half of the building. The first tenants will gain access to begin their improvements in January, resulting in move-ins to occur as early as April or May of next year.

200 Spectrum Center Drive’s success is not surprising given its unprecedented quality and the limited demand in the surrounding high-rise projects. As a result, Irvine Company is unofficially considering the end of 2016 as a potential date to break ground on their next high rise, 400 Spectrum Center Drive, which will be substantially similar to their most recently constructed asset. In addition, Irvine Company has also begun marketing numerous low-rise buildings that they plan to construct off of Sand Canyon Avenue, minutes away from their new tower. Given this flurry of activity in a relatively concentrated area, it’s no surprise that many predict the core of Orange County to slowly shift farther south and away from the airport.

In other development news, Stadium Towers, which was purchased by CIM Group last year, just submitted plans to build a second tower on the adjacent parcel that they own. The land is already entitled and, depending on the size of the new building, it might only cost them $100 million to correct their plural named project by adding the second tower.

Image via DJM Capital Partners, Inc.

Huntington Beach, one of the smaller office markets in Orange County from a square footage perspective, may see increased demand as a result of some large-scale community developments. Pacific City, an outdoor, high-end mall under construction, which will feature tenants such as Equinox, Lululemon, and Sephora, will be a game changer. In addition, a myriad of other luxury apartment and condominium projects are coming online, likely to attract the kinds of young professionals that corporate tenants want to hire.

As we near the end of 2015, it appears the Orange County office market is nowhere near losing steam. It’s an exciting time to be a developer, and an expensive time to be a tenant. But there are still options for the price conscious if you know how to negotiate them. With the right representation, it’s possible to soften the sticker shock.

Tucker Hughes is managing director at Hughes Marino, an award-winning commercial real estate firm with offices across the nation. As head of Hughes Marino’s Orange County and Los Angeles offices, Tucker specializes in tenant representation and building purchases throughout Southern California. Tucker makes frequent media appearances to speak on the future of commercial real estate, and is also a regular columnist for Entrepreneur.com. Contact Tucker at 1-844-662-6635 or tucker@hughesmarino.com.

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