Irvine Co. Slashes Some Rents 20%

Grappling with rising vacancies and slowing demand from new tenants, Orange County’s largest commercial property owner has slashed rents for some offices by as much as 20%.

The price cuts by Irvine Co. reflect growing weakness in the region’s once-booming commercial real estate market and are expected to push other property owners to lower their rents.

Irvine Co. is a bellwether for the commercial market in Orange County, one of the strongest office markets in the state.

The company has been trying to fill more than 600,000 square feet of space vacated in recent months, mostly from tenants that consolidated into campus-style offices elsewhere in the county.

Although no one is forecasting a deep market slump, the sluggish economy is taking its toll in commercial real estate. Gateway Inc., with an office in Lake Forest, and Buy.com Inc. in Aliso Viejo announced cutbacks in recent months and returned a combined 300,000 square feet of space to the market. Other companies have put off expansion plans.

At the same time, county developers are expected to complete about 3 million square feet of new construction this year, about 25% less than a year ago but still robust by historical standards, according to Voit Commercial Brokerage.

The combination will create more competition for tenants, pushing down prices this year from record levels that created a long period of prosperity for landlords.

“I think it’s a major sign to property owners in Orange County that they will have to get more aggressive on office rents if they want to maintain occupancy levels,” said Louis Tomaselli, senior vice president at Voit.

Irvine Co. recently sent local commercial brokers a letter describing its desire to stave off a slowing economy by cutting rents 15% to 20%, mostly in so-called flex-tech buildings, which can be used either as offices or light industrial space. The reduction brings its prices more in line with other landlords, brokers said.

“The rates are back to where they were six months ago, in response to the current and pending vacancies in the county, as well as a softening in tenant demand,” Irvine Co. spokeswoman Jennifer Smith said.

In south Orange County, where most of Irvine Co.’s commercial properties are, the average price per square foot rose to $2.54 in the first quarter from $2.20 a year ago, according to CB Richard Ellis.

Tenants often pay a premium for Irvine Co. properties--an amount some brokers peg at 20% to 40% more than competitors’. But the company’s decision could trickle down to other developers, which probably would ratchet down prices to maintain their distinction.

“When they move, the market moves,” said Robert Reicher, research manager at Grubb & Ellis Co. in Newport Beach. He said demand has been drying. “There are people out there, but they’re being a lot more cautious about committing.”

South Orange County’s vacancy rate through the first quarter rose to 15.9% from 9% a year earlier, said Steve Case, a senior vice president at CB Richard Ellis. The brokerage expects the rate to approach 20% this year, pushed higher by the amount of space that came onto the market countywide and remains unleased.

Countywide, vacancies edged up in the first quarter to 11.2% from 9.7% last year, and average rent jumped to $2.30 a square foot from $2.08.