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Growing Uncertainty in Orange County Office Market Good for Tenants

By Tucker Hughes

2016 began with a rare quarter of negative absorption, an aggregate demand-related metric that tracks the total change in occupied space. Fortunately for property owners and the greater economy, the last three months have been decidedly more favorable, with another strong period of growth for the office and industrial sectors throughout Orange County. That being said, the impact on tenants has not been as correlated as would be expected.

There is a palpable yet mysterious hesitancy and fear in the market. Property owners are seriously questioning the longevity of this real estate upswing. Is it sustainable? Will there be another market pullback in the short term? How will new supply affect the demand for existing properties? The risk-averse nature of most real estate owners means that we may be entering a period of rent stagnation while the fundamentals work their way back to healthy levels.

In the face of questionable circumstances, landlords are more ready than ever to engage in early renewal negotiations with tenants. Even for tenants with relatively small amounts of space, we are seeing deals being struck upwards of 15 months out from their lease expiration dates. Of course, landlords would not be doing this if they didn’t feel it made sense, which begs the question as to whether tenants should wait to see how the market plays out in coming months. In most cases it will make sense to commit sooner than later, as it takes considerable time to create a competitive environment in which to negotiate with your current landlord. Finding space, negotiating economics, finalizing the lease, designing and permitting the construction, completing the buildout, and ultimately moving into the space requires time. If you’re trying to move without adequate time or preparation, the costs can be significant.

In general, tenants should aim to have a new lease signed at least six months prior to expiration. If we consider a lease expiring 15 months from now, that would leave nine months of play before a favorable negotiation position becomes more challenging. Such a short period is likely not long enough to “wait out” the current cycle. This means that getting in front of future appreciation will likely be less expensive than waiting and hoping for a precipitous drop in rents.

Spotted Around Town

Several new developments are getting closer to reality. The steel frame of the Irvine Company’s new office tower at 400 Spectrum Drive, which will mirror the very successful 200 Spectrum Drive, continues to make great progress as it approaches the top of its structure. The Boardwalk on Dupont and Jamboree has finally begun installing the first of its steel beams. Many other development sites are getting close to hitting “go” in a meaningful way too. The biggest question marks for developers will be how high they can push the rental rates in these projects and what the interest rate environment will be when they look to exit or refinance.

Although we are only briefly into the third quarter, the first few days have started out strongly negative in terms of net absorption. Landlords are holding their breath to see how this year will continue to unfold.

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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