High-Rent District

By MELINDA FULMER

March 6, 1997 12 AM PT

SPECIAL TO THE TIMES

Adecco Employment Services Inc. had a chance last year to renew the lease on its Laguna Hills offices for five more years, but it hesitated. It proved to be a costly decision.

Adecco and other companies in many pockets of Southern California are now finding themselves caught in a booming market for office space, in which landlords have all the say and double-digit rent increases are the rule.

“Our landlord is going to jack up our rates but is unwilling to give us any concessions,” said Ed Palma, director of the company’s real estate operations. “A year ago, it would have been a different story.”

The local surge in demand for office space mirrors a national trend. Office rents nationwide are growing at the fastest clip in 16 years, according to a study released Wednesday by CB Commercial Real Estate Group. Some markets, such as Minneapolis, Dallas and Atlanta, saw rents shoot up more than 20% last year.

In Orange County, the blocks of high-rise office buildings around John Wayne Airport are reporting the lowest vacancies in almost a decade, while space in top-quality office buildings in the southern end of the county is becoming almost impossible to find. Demand for office space is also surging in media and entertainment enclaves of Glendale, Burbank and Universal City.

And the bull office market shows no signs of slowing, analysts say, given the strong economy and lack of new construction. “We should see another year of significant rent increases in 1997,” said Raymond Torto, head of the CB Commercial research unit.

Indeed, shrinking vacancies and surging rents in the John Wayne Airport area and south Orange County are putting the squeeze on small businesses whose bottom line can be greatly affected by its occupancy costs.

In the airport area, site of the largest collection of office buildings in Orange County, the vacancy rate has dipped below 7% for the first time in almost a decade. In south Orange County, attractive because it’s close to many executives’ homes, top-quality office space is in such high demand that the vacancy rate has shrunk to 3.75% and rents have shot up by double digits to an average of $1.83 per square foot.

The turnaround in the airport area started two

years ago, when the economy regained its footing and companies began adding workers and leasing more space to accommodate them. The trend picked up even more last year, when about 54% of the companies expanded their payrolls, according to UC Irvine’s annual executive survey.

Landlords say these firms, coupled with a handful of corporate start-ups and firms migrating south from Los Angeles, took large blocks of space off the market last year, pushing vacancies down and prices up.

“It’s more of a landlord’s market than it was three years ago,” said Bill Halford, vice president of Irvine Office Co., a unit of Irvine Co. “Everything’s not on sale anymore.”

Halford should know. Irvine Co. is Orange County’s largest office landlord, owning 5 million square feet of office space. In recent years, the company has set the pace for other landlords, bumping rents up in Irvine and Newport Beach.

The company’s buildings in tony Newport Center, long coveted by financial firms for ocean views and snob appeal, are now commanding 25% higher rental prices than they did three years ago.

Landlords such as Irvine Co. can command the higher rates because of the frenzied market. Companies are scrambling to find blocks of space large enough to accommodate their growth, sometimes engaging in bidding wars for desired space.

Some large companies just accept higher rents as the cost of doing business in a prestigious area. “When you’ve tasted champagne, how do you go back to beer?” quipped Jerry S. Neitlich of Irvine-based Corporate Real Estate Advisors, who helps tenants negotiate office deals.

But other firms on tighter budgets will be forced to give up some of their space or move to a less expensive location, said Gordon Wyllie, executive director of the International Assn. of Corporate Real Estate Executives.

Chuck Rosenberger, for example, moved his insurance brokerage, NuWest Insurance Services, out of the sleek 2600 Michaelson Drive building in Irvine and into a smaller building several blocks away when his lease was up last year. He wanted to expand his company’s quarters by 50%, but the cost at the old location would have been prohibitive. So he moved to a slightly cheaper, less glamorous address, which helped offset the costs of the 50% expansion, with enough left over to pay for a new computer system.

“We wanted a nice building for our employees, but there was no need to stay in that building,” he said. “We don’t have a lot of walk-in clients.”

Smaller tenants such as NuWest moved into top-quality buildings in the early 1990s when there was a surplus of space and rents were low. Now they’re likely to be moving out as those leases expire, rates go up and other incentives are cut back or eliminated, brokers say.

Adecco Employment, for example, is facing a 20% increase in rent if it stays in its Laguna Hills offices after this month. Its budget for new carpet and paint has been slashed and the owner has eliminated crucial clauses in the lease that would allow the company to expand in the building or cancel its lease.

Reduced incentives prompted the law firm Sheppard Mullin Richter & Hampton to move rather than overhaul its outdated offices in a Newport Beach high-rise earlier this year.

When the old landlord offered $12 per foot to renovate the offices, the firm decided to move into Center Tower in Costa Mesa. “We needed a lot more dollars than that,” partner John Simon said.

Indeed, it cost $50 a square foot to prepare the new offices for the firm, but the landlord picked up most of the tab.

The demand for more space is expected to drive most office rents in the airport area and south Orange County up about 10% by the end of the year, and even higher next year.

Once that happens, companies may start looking for a better bargain in the central part of the county, which has more vacant space and lower rents because a number of companies left the area or consolidated operations elsewhere during the state’s economic slump in the first half of the decade. Vacancy rates in the area, which includes Anaheim and Orange, has hovered at about 22%.

Soaring rents could also spur new construction, brokers said.

“Once you see rents hit $2 [per square foot], they will convince the banks they can get $2.25 by the time the building is built,” Santa Ana real estate executive Barry Saywitz said. “But don’t expect to see many cranes in the air this year, at least in most areas.

“While rents have made significant jumps, they are still nowhere near the point that would justify the replacement cost of a new [high-rise] office building,” Halford said.

Bloomberg News contributed to this report.

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Office Hot Spots

Areas where low vacancy is creating a landlord’s market. Lease rates are expected to increase in these locations. Fourth-quarter 1996 vacancy rates:

Orange County

Irvine Business Complex: 6.37%

Irvine Spectrum: 3.83%

Newport Center: 4.70%

Airport Office Area: 6.89%

South Orange County: 6.62%

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Los Angeles County