Development Spurt Should Loosen Office-Space Market

Developers will build 3.3 million square feet of office space in Orange County this year, more than the total amount constructed over the last four years, according to a new report by Marcus & Millichap Real Estate Investment Brokerage Co.

Most of the new buildings will be constructed in the area of John Wayne Airport and South County, where more than half of the county’s corporate offices are clustered. But with so much space being added to the market at one time, vacancy rates are bound to rise, the research report from the firm’s Orange County office concluded. Currently, the vacancy rate for the county’s top buildings stands at 11.8%, rising from single-digit levels over the last year.

Landlords who had been growing accustomed over the last year to raising rents as much as 25% in the tight market will see far smaller rent increases. Those most affected will be in the airport area, where rents have climbed to about $2.40 per square foot, the county’s highest rate, the report said. Such price jolts had been forcing more tenants to move their offices into low-rise industrial buildings, especially in the nearby Irvine area.

“The new construction will impact the high-rise market,” added Jerry Neitlich, of IN/HouseCorp. Real Estate, an Irvine company that negotiates leases on behalf of tenants. “I think it’s going to add more pressure for more negotiating and more concessions to retain tenants.”

Neitlich added that many of his smaller clients, turned off by higher rents in the airport area, have been looking outside of the market’s core into such cities as Huntington Beach, Tustin and Orange, where landlords have been more flexible.

Firms have more room to bargain because of the construction spurt and the attraction of low-rise industrial buildings as offices. “Deals are a lot more negotiable now as opposed to a take-it-or-leave-it attitude that existed 12 months ago,” Neitlich said.