By Bob Caudill, Executive Vice President, Colliers
We continue to see a flight by tenants into low-rise office properties, typically four stories or less, and out of high rises. This trend began pre-pandemic, but COVID has undoubtedly accelerated its movement.
Asking rates in the market have flattened, while concessions like free rent, beneficial occupancy and improvement allowances have increased. The surge in construction costs continues, putting stress on the economics of lease deals. In addition, construction material delivery delays have impacted the completion of tenant improvements.
We will continue to see challenging times for office owners in the short-term as tenants are unsure how much space they need going forward. More tenants will also struggle to pay rent on time. In the long-term, although some industries have learned that they can remain successful with most of their employees working remotely, others are experiencing negative impacts on creativity and collaboration. As a result, their businesses have suffered financially, and they will require their employees to return to the office.
Activity and Impact
The Irvine Company’s Spectrum Terrace has set a new standard in design and quality for low-rise, Class A office properties. Tenants in this project are creating a workplace environment that employees will want to come back to, including more inviting office space and common areas that provide outdoor workspace, amenities and fitness.
South Orange County, specifically the Spectrum area, is currently experiencing the most activity. The region’s “work, play, live” design attracts life sciences, technology and automotive industry users. Those looking for low-rise options will see limited opportunities. In contrast, those willing to lease space in high-rise properties will see aggressive concessions, including reduced parking expenses, to remain competitive with low-rise properties.
Incentives and Demand
Although the market continues to lean heavily in favor of tenants in many ways regarding economics and available concessions, high-quality options are still limited, and demand will outweigh supply throughout the county.
Most submarkets are moving toward the highest vacancy rates we have seen in the past 15 years. The county is now approaching a vacancy rate of 17 percent in airport-adjacent markets. The central Orange County vacancy rates are north of 20 percent because their base square footage has significantly more high-rise buildings.
Tenant improvement allowances have moved to historical highs, primarily due to the unprecedented increase in construction costs. Free rent and beneficial occupancy are approaching early 2000 concession packages, with more than one to two months of free rent per lease year now being the norm. Moving allowances to the tenant and commission bonus fees to their broker are also returning to the market.