High-Rise Rents Come Down to Earth : Real estate: Small businesses can now afford space in fashionable towers around John Wayne Airport, where they pay little more than they did at humble low-rises.
George E. Peterson looked at the figures and decided that it was time to move.
So Project Dimensions Inc., like a lot of small companies, traded its two-story office building in Newport Beach last year for the 11th floor of an office tower across the San Diego Freeway in Irvine.
From his corner office at 5 Park Plaza, Peterson, the firm’s president, can look out and see several company projects.
“Our image is professional services, and our clients are the big guys,” says Peterson, whose company is a consultant for developers. “That was how we wanted to position ourselves, and this building was part of it.”
Project Dimensions is not the only company around John Wayne Airport that has moved up to fancier or more fashionable digs. More than one-fifth of the space in the larger office buildings around the airport--about 5 million square feet, or the equivalent of a dozen office towers--is vacant.
Rents have dropped so low that often they do not even cover the mortgage payments of some landlords anymore. There is little difference between lease rates in a snazzy new office tower or one of the more humble low-rise buildings on side streets near the airport. So, many small tenants are making the jump into towers they could not have afforded a few years ago.
They leave behind landlords desperate to get someone into their buildings and willing to slash their rents to do so.
“Rents in some of these low-rise office buildings aren’t much above $1” per square foot per month, says Robert Dunham of Newport Economics Group, a real estate consultant who rents space in the area. “That’s about what they were 10 years ago.”
By contrast, even a small tenant can rent space in some of the surrounding office towers for as little as $1.50 to $1.60 a square foot, real estate brokers say.
While Project Dimensions will not reveal what it is paying, Peterson says his 3,500 square feet of space--about one-third larger than the average floor space in a new house--costs only a little more than what he paid at his old two-story building.
Some landlords are even complaining that their neighbors are neglecting routine maintenance of older, smaller buildings to hold rents down. So parts of the airport neighborhood--the county’s shiny “new downtown”--is taking on a decidedly seedy appearance, they say.
“If you go and look at the low-rise office buildings and some industrial buildings in the area,” says Richard G. Sim, president of the Irvine Co.’s office unit, “you’ll see why I believe some landlords have chosen low rents rather than to reinvest in their buildings.
“We’re not talking about major renovations here: Paint and landscaping don’t cost a lot of money,” he said.
Others find Sim’s remarks--first made two weeks ago at a trade association meeting--a tad self-serving. In today’s market, painting a building probably will not bring in any more rent, local brokers say, but it might help the giant Irvine Co. fill its own buildings by sprucing up the neighborhood a bit.
The migration from older, smaller buildings to bigger, newer buildings with more pizazz is going on throughout the county and many parts of the nation, experts say.
The national office vacancy rate is 20%, the highest it has been since at least 1980, and rents are low all over. In Orange County, the vacancy rate is 22%.
“Houston was a textbook example in the mid-1980s,” says Peter Marr, western division manager for CB Commercial Real Estate, the old Coldwell Banker commercial real estate brokerage. “Their biggest vacancy rates were in Class B and C (generally, smaller and older) office buildings, because everybody was moving into the office towers.”
In Orange County, the migration is probably occurring around the airport more than anywhere else. That is not surprising, considering that the airport area’s 25 million square feet of office space is as much as some medium-size cities have and much more than any other place in the county.
Then there are five more big office towers getting ready to open here, with another million square feet of space still not leased, according to broker Grubb & Ellis Co. And tenants have taken a hike: A year ago, 18,000 more square feet of space were leased here than during the same period early this year.
But the construction boom days are over. Although there are 18 high-rises on the drawing boards for the airport area, they will probably be built only when the developer has at least half the tenants already lined up. While anything can happen, brokers say that is unlikely to occur for at least the next year or so.
That means some of the smaller office and industrial buildings that might once have been scheduled to be torn down and replaced with office towers will remain for the time being. Others cannot be replaced by high-rises because of airport-related zoning or height limits. As these smaller buildings age, maintenance will probably continue to be a problem.
But landlords may be in better shape to deal with that in the future. If few new office towers go up here in the next couple of years, the ones already built will eventually begin to fill up, and rents will rise again.
That means the little guys may be back in the little office buildings in five years or so, when the leases they are signing today have expired.
“The small buildings may be emptying out now,” says Tom Taylor, a Grubb & Ellis broker, “but five years from now, when these leases expire and the tenants see what they’ll have to pay to renew, they’ll be right back in a two-story building.”
Office Rents The average asking price for space in existing office buildings in the three cities that adjoin John Wayne Airport have declined steadily since the third quarter of 1989. Source: CB Commercial Real Estate
