Rising Demand for O.C. Offices Boosts Rents

By E. SCOTT RECKARD

Jan. 15, 1998 12 AM PT

TIMES STAFF WRITER

Warning Orange County office tenants to “act quickly to sign leases,” Grubb & Ellis Co. said Wednesday that rents for top-quality space will rise by an average 15% in 1998, following a “tidal wave of demand” that pushed them 10% to 25% higher last year.

With Orange County’s economy surging and the jobless rate below 3%, business service, education, insurance, health care, computer and communications companies are expanding, the national commercial real estate brokerage said.

Eager developers will complete more than 500,000 square feet of new office space this year, but that’s not enough to alleviate demand, Grubb & Ellis said.

Indeed, the crunch is not expected to ease until 1999, when 2 million square feet of office space is scheduled to be completed, the firm said.

The projections came in the brokerage’s annual report for the Los Angeles Basin, which will be discussed at a meeting of Grubb & Ellis and other real estate experts Friday at the Westin South Coast Plaza.

The report described a similar boom in the industrial real estate market, portraying it as a “land rush . . . beyond even the most bullish expectations.”

It said industrial lease rates, which slipped in the early ‘90s and moved up slowly in 1995 and 1996, rose sharply in 1997 and will go up at a double-digit pace in 1998.

“Even the retail market, often characterized as overbuilt, moved toward firmer ground,” the report said, noting that rents for high-visibility retail space, which have been stagnant for much of the decade, are now rising sharply.

“Savvy retailers understand the importance of an A-plus location and are willing to pay to get it,” the report said.

The Grubb & Ellis report is one of several that have warned of a sharp increase in lease rates. Jerry S. Neitlich, whose Irvine-based Corporate Real Estate Advisors counsels office tenants, alerted clients in June that “available space is disappearing.

“No more bargain hunting, even for subleases,” said Neitlich, who predicted increases of 33% to 40% for those whose 1990s leases were running out. “Start planning for reality.”

Michael L. Meyer, a longtime consultant in Orange County for E&Y; Kenneth Leventhal Real Estate Group, said that for the last three years, demand for office space has risen while no new offices have opened. In areas such as Newport Center, lease rates have doubled in three years, he said.

“I concur that office users should lock in space for as long a term as makes sense for their business right now,” Meyer said. “It’s getting to a situation where the users will not have their choice of space where they want to be--it just won’t be there.”

As recently as 1995, the office vacancy rate for the entire county was about 15%, and the markets in the western and central part of the county remain in that range.

But by the end of 1997, the countywide vacancy rate had fallen to 9.4%, and vacancies were below 6% in the John Wayne Airport and South County areas.

Those areas also commanded the county’s highest rents. For top-quality office space in the airport area, landlords were asking $2 per square foot in monthly rent at the end of 1997, up from $1.70 a year earlier. The asking rate for South County offices was $1.80 per square foot.

Those rates still were below some other Southern California areas, as the real estate markets across the region enjoyed what the forecast called a “torrent” of good news.

In Glendale, brimming with entertainment industry spillover from the booming Burbank-Universal City area, landlords were asking $3 per square foot for top-end space, known as Class A in real estate jargon.

The West Los Angeles-Beverly Hills area and Pasadena also had higher office rents than the John Wayne Airport area. Downtown Los Angeles was about the same.

Real estate investment trusts, which buy, build and manage portfolios of properties, were bidding fiercely on Orange County offices. Competition is so intense that many projects sell before they are officially listed for sale, Grubb & Ellis said.

While the airport and South County office markets were in the heaviest demand through most of the 1990s, the central, north and west county markets have joined the bull market, it said.

As Class A office space is absorbed, the pressure will increase on older and less fancy digs this year, the report said.

“The bulk of available space left on the market will be in Class B and Class C properties,” it said. “Class B rents, which rose moderately in 1996 and 1997, are expected to jump by as much as 15% in 1998.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Space Squeeze Is On

Orange County office space will become more scarce and top-quality space is expected to get more expensive as the local economy continues to improve in 1998. Vacancy and lease trends and the rates in other Southern California regions:

O.C.: Vacancy Rate

1999*: 5.6

Asking Lease Rate

(weighted average per square foot)

1999*: $2.25

Asking Rate by Region

(top-quality space, fourth quarter 1997)

Airport area, Parts of Newport Beach, Irvine, Costa Mesa, Santa Ana, Tustin and Fountain Valley: $2.00

South County, Irvine Spectrum area, San Clemente, San Juan Capistrano, Aliso Viejo, Dana Point, Laguna Hills, Laguna Niguel, Mission Viejo, Foothill Ranch, El Toro, Rancho Santa Margarita: $1.80

Central County, Orange, part of Anaheim, Santa Ana and Tustin: $1.55

North County, Fullerton, part of Anaheim, Buena Park, Placentia, Brea and La Habra: $1.62

West County, Huntington Beach, Westminster, Garden Grove, Cypress, La Palma, Stanton, Los Alamitos, part of Fountain Valley and Costa Mesa: $1.55

Countywide: $1.80

Note: Asking rate is rate per square foot that landlords are asking prospective tenants to pay

1997 End-of-Year Comparison

Riverside: $1.45

Ontario International Airport area: $1.75

L.A. International Airport area: $1.29

Downtown Los Angeles: $2.00

Downtown Long Beach: $1.84

Santa Clarita Valley: $1.77