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Room to grow
In today's economic slowdown, it may not cost you to get nicer digs for your biz.
By Amy BentleyPublished: October 01, 2008
It’s a tenant’s market in commercial real estate, just as it’s a buyer’s market on the residential front.
Businesses located in Orange County – particularly those leasing office spaces – can find good deals today, and brokers say it’s a good time if you’re planning to move your office into bigger and better digs.
Availability rates for office space, industrial space and space for healthcare and technology businesses were higher for the second quarter of this year, compared to the same period last year. For office space, the availability rate is almost double, according to second-quarter reports from Irvine-based Voit Commercial Brokerage. Landlords want to fill the spaces and are offering incentives and rent breaks.
According to Voit’s second-quarter report for 2008, the overall office vacancy rate for direct and sublease space in Orange County was 14.46 percent, an increase over last year’s second-quarter rate of 8.95 percent. The increase is a result of new construction coupled with a slowing economy as financial markets correct, the report says. South County’s vacancy rate for the second quarter was even higher, at 15.91 percent; the Irvine Spectrum vacancy rate was 21.45 percent, according to Voit.
The total amount of office space available in Orange County was 19.76 percent, up from 13.2 percent a year ago.
“The good news is that the second quarter of 2008 was the first positive quarter of net absorption (occupancy) in over a year, with 112,000 square feet for all of Orange County,” says Jeff Osborn, managing director for CBRE in Orange County. Osborn says many tenants have deferred real estate moves due to the economy: “We’re still in a window of opportunity for tenants today. Overall, rents have come down, and there has been an increase in rental concessions.”
Lease rates for Class A, B and C buildings have dropped 7 to 8 cents across the county, he says, and there has been an even greater price drop in lower-quality buildings.
“Your best opportunities are always ones that you can’t see,” Osborn says. “You have to go find them. Every landlord has a motivation point. Typically, landlords try to hold their face rate, but they will negotiate today. Landlords want credit-worthy tenants in their buildings. In tough times, good credit is king.”
Increased availability rates and lower rents for office space makes now a good time to jump from a Class B office to a higher-quality and better-located Class A office, says Louis Tomaselli, senior vice president at Voit’s Anaheim Metro office.
“If I were a tenant in a Class B building, I could more than likely move to a high-rise Class A building for the same price as I was paying for my Class B,” Tomaselli says.
Tenant-improvement allowances have also become common. If an office space doesn’t have a layout the way a new tenant prefers, landlords will often pay to have the space altered. A year ago, the allowance was about $15 to $20 per square foot; today it’s double that and, in some cases, even higher, says Tomaselli. “That money goes to make the space nice, so it’s a capital improvement to the building, but it helps the tenant.”
There can be rent discounts, as well, says Tomaselli. Actual rent amounts being signed on office leases are 15 to 20 percent less today than the current asking rates and the signing rates of a year ago, he says.
“Landlords are offering free rent to entice tenants to move sooner,” he adds. “If you sign a five-year lease today, you can get four to five months of free rent. That is another way of reducing the rent. When the market is down, you get your deal. You can never determine the bottom, but we’re near the bottom.”
From a statistical standpoint, the industrial market is showing strength, with less than 4 percent vacancy and with minimal land available for future development. Nevertheless, negative media attention has spilled over to the industrial market, which has resulted in much less activity in 2008 than in previous years. The drop in activity has led landlords of industrial space to offer aggressive incentives toward tenants and sellers to make price reductions, says Dale Camera, vice president/partner of Lee & Associates Commercial Real Estate Services in Irvine. Savvy buyers and tenants in today’s market have great opportunities to secure quality real estate at a discount, Camera says.
Jeff Moore, senior managing director for CBRE in Orange County, sums up the commercial market this way: “It’s never as bad as it seems, and it’s never as good as it seems. The hype gets in the way of things. Orange County is a place where people want to live and work.”
TIPS FOR A SMART OFFICE MOVE
Look for amenities. “In a tough economy, you want to be able to retain a quality workplace. Look for a better office, better access to retail services, better transportation access. Look for a landlord who has had a long-term position in the marketplace,” says Kevin Turner, senior vice president of Voit Commercial Brokerage in Irvine. Also seek abundant parking and a building with stable tenants and a low tenant turnover rate.
Seek incentives from landlords. “Today is the time to strike, because there are incentives available: rent concessions, moving costs, early occupancy, free rent for a period of time, additional tenant- improvement incentive funds. Buyers can negotiate better, locking in flat leases that keep rent increases down,” says Turner.
Remember that the furniture industry has been pummeled by the economic downturn, and businesses can get great deals on office furnishings. “You could save 20 to 30 percent off of what prices were a year ago,” says Louis Tomaselli, senior vice president at Voit’s Anaheim Metro office. Offices already filled with nice used furnishings can be a bargaining chip for tenants. At one time there were 8.5 million square feet of mortgage company office space in Orange County; now there is 1.5 million square feet, says Jeff Osborn, managing director for CBRE in Orange County. This has led to an oversupply of furnished offices competing with unfurnished spaces to attract tenants, he says.
Go green. Look for new office space in a building that is “LEED certified.” This means the building is rated as environmentally friendly under the Leadership in Energy and Environmental Design rating system, sponsored by the U.S. Green Building Council. A growing number of new office projects in Orange County are LEED certified, and some older buildings are being refurbished to earn LEED certification. These buildings offer features such as water-efficient plumbing fixtures, and interior paints and sealants that are low in volatile organic compounds (VOCs), chemicals that cause adverse health effects. “This is becoming more and more important to tenants every day. Corporate America wants to be a good corporate citizen and offer employees a safe workplace,” says Osborn.
Seek landlords who are financially strong. Tenants want a building’s common areas to be well maintained, and an unexpected change of ownership could lead to future problems for the tenant, Osborn says.
– Compiled by Amy Bentley
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It’s a tenant’s market in commercial real estate, just as it’s a buyer’s market on the residential front. Businesses located in Orange County – particularly those leasing office spaces – can find good deals today, and brokers say it’s a good time if you’re planning to move your office into bigger and better digs. Availability rates for office space, industrial space and space for healthcare and technology businesses were higher for the second quarter of this year, compared to the same period last year. For office space, the availability rate is almost double, according to second-quarter reports from Irvine-based Voit Commercial Brokerage. Landlords want to fill the spaces and are offering incentives and rent breaks. According to Voit’s second-quarter report for 2008, the overall office vacancy rate for direct and sublease space in Orange County was 14.46 percent, an increase over last year’s second-quarter rate of 8.95 percent. The increase is a result of new construction coupled with a slowing economy as financial markets correct, the report says. South County’s vacancy rate for the second quarter was even higher, at 15.91 percent; the Irvine Spectrum vacancy rate was 21.45 percent, according to Voit. The total amount of office space available in Orange County was 19.76 percent, up from 13.2 percent a year ago. “The good news is that the second quarter of 2008 was the first positive quarter of net absorption (occupancy) in over a year, with 112,000 square feet for all of Orange County,” says Jeff Osborn, managing director for CBRE in Orange County. Osborn says many tenants have deferred real estate moves due to the economy: “We’re still in a window of opportunity for tenants today. Overall, rents have come down, and there has been an increase in rental concessions.” Lease rates for Class A, B and C buildings have dropped 7 to 8 cents across the county, he says, and there has been an even greater price drop in lower-quality buildings. “Your best opportunities are always ones that you can’t see,” Osborn says. “You have to go find them. Every landlord has a motivation point. Typically, landlords try to hold their face rate, but they will negotiate today. Landlords want credit-worthy tenants in their buildings. In tough times, good credit is king.” Increased availability rates and lower rents for office space makes now a good time to jump from a Class B office to a higher-quality and better-located Class A office, says Louis Tomaselli, senior vice president at Voit’s Anaheim Metro office. “If I were a tenant in a Class B building, I could more than likely move to a high-rise Class A building for the same price as I was paying for my Class B,” Tomaselli says. Tenant-improvement allowances have also become common. If an office space doesn’t have a layout the way a new tenant prefers, landlords will often pay to have the space altered. A year ago, the allowance was about $15 to $20 per square foot; today it’s double that and, in some cases, even higher, says Tomaselli. “That money goes to make the space nice, so it’s a capital improvement to the building, but it helps the tenant.” There can be rent discounts, as well, says Tomaselli. Actual rent amounts being signed on office leases are 15 to 20 percent less today than the current asking rates and the signing rates of a year ago, he says. “Landlords are offering free rent to entice tenants to move sooner,” he adds. “If you sign a five-year lease today, you can get four to five months of free rent. That is another way of reducing the rent. When the market is down, you get your deal. You can never determine the bottom, but we’re near the bottom.” From a statistical standpoint, the industrial market is showing strength, with less than 4 percent vacancy and with minimal land available for future development. Nevertheless, negative media attention has spilled over to the industrial market, which has resulted in much less activity in 2008 than in previous years. The drop in activity has led landlords of industrial space to offer aggressive incentives toward tenants and sellers to make price reductions, says Dale Camera, vice president/partner of Lee & Associates Commercial Real Estate Services in Irvine. Savvy buyers and tenants in today’s market have great opportunities to secure quality real estate at a discount, Camera says. Jeff Moore, senior managing director for CBRE in Orange County, sums up the commercial market this way: “It’s never as bad as it seems, and it’s never as good as it seems. The hype gets in the way of things. Orange County is a place where people want to live and work.” TIPS FOR A SMART OFFICE MOVE Look for amenities. “In a tough economy, you want to be able to retain a quality workplace. Look for a better office, better access to retail services, better transportation access. Look for a landlord who has had a long-term position in the marketplace,” says Kevin Turner, senior vice president of Voit Commercial Brokerage in Irvine. Also seek abundant parking and a building with stable tenants and a low tenant turnover rate. Seek incentives from landlords. “Today is the time to strike, because there are incentives available: rent concessions, moving costs, early occupancy, free rent for a period of time, additional tenant- improvement incentive funds. Buyers can negotiate better, locking in flat leases that keep rent increases down,” says Turner. Remember that the furniture industry has been pummeled by the economic downturn, and businesses can get great deals on office furnishings. “You could save 20 to 30 percent off of what prices were a year ago,” says Louis Tomaselli, senior vice president at Voit’s Anaheim Metro office. Offices already filled with nice used furnishings can be a bargaining chip for tenants. At one time there were 8.5 million square feet of mortgage company office space in Orange County; now there is 1.5 million square feet, says Jeff Osborn, managing director for CBRE in Orange County. This has led to an oversupply of furnished offices competing with unfurnished spaces to attract tenants, he says. Go green. Look for new office space in a building that is “LEED certified.” This means the building is rated as environmentally friendly under the Leadership in Energy and Environmental Design rating system, sponsored by the U.S. Green Building Council. A growing number of new office projects in Orange County are LEED certified, and some older buildings are being refurbished to earn LEED certification. These buildings offer features such as water-efficient plumbing fixtures, and interior paints and sealants that are low in volatile organic compounds (VOCs), chemicals that cause adverse health effects. “This is becoming more and more important to tenants every day. Corporate America wants to be a good corporate citizen and offer employees a safe workplace,” says Osborn. Seek landlords who are financially strong. Tenants want a building’s common areas to be well maintained, and an unexpected change of ownership could lead to future problems for the tenant, Osborn says. – Compiled by Amy Bentley |
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