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July 27, 2016

Airport-Area Rents Too Rich For Some Tenants' Blood

ALM Globe St

Carrie Rossenfeld

Irvine, CA - With recent office lease-rate increases in that submarket, tenants are migrating out and flocking to more-affordable markets or even moving down a class to save money, Kidder Mathews' Jerry Holdner tells GlobeSt.com EXCLUSIVELY.

Holdner: "We have seen many buildings recently remodeled with better looking lobbies, improved landscaping-even elevators with small screen monitors for reading the latest financial, weather reports and popular news."

IRVINE, CA-With recent office lease-rate increases in the Airport submarket, tenants are migrating out and flocking to more-affordable markets or even moving down a class to save money, Kidder Mathews' director of research Jerry Holdner tells GlobeSt.com. A recent report from the firm reveals that OC office lease rates rose for the 12th consecutive quarter. We spoke exclusively with Holdner about the continually rising office lease rates and how tenants are reacting to them.

GlobeSt.com: How are tenants reacting to Orange County's ever-increasing office-lease rates?

Holdner: As the economy in Orange County continues to improve and as job growth increases, the amount of available office space decreases. With the decreases in available space, we've seen some decent gains in the asking lease rates. In fact, rates have risen 7.4 % over the last 12 months. The current asking lease rate in Orange County for office space is $2.32 per square foot per month. The cycle low rate was $1.87 back in 2012. With these increases, we're seeing tenants migrate out of expensive markets such as the Airport market and flock to other more affordable submarkets. We're also seeing some tenants move from class-A to class-B space to save money when they come up for renewal.

GlobeSt.com: What are tenants getting for these increases?

Holdner: Keep in mind that the market is the real driver in the price increases. Many of the landlords in Orange County have spent a lot of money on tenant improvements, especially in class-A office buildings, to attract and maintain occupancy. We have seen many buildings recently remodeled with better looking lobbies, improved landscaping-even elevators with small screen monitors for reading the latest financial, weather reports and popular news. Landlords are also creating more areas in their projects for tenants to gather socially. Amenities such as exercise fitness areas, golf putting areas, basketball courts, patios with outdoor furniture, ATM machines and free Wi-Fi are becoming more common. Some landlords provide laundry pick-up/delivery services, auto detailers on site and invite gourmet lunch trucks on occasions to service the tenants.

GlobeSt.com: What are tenants asking for from landlords in return for the higher rental rates?

Holdner: Tenants today are asking landlords for more collaborative space to attract a new, younger Millennial workforce. For example, they are requesting more dining areas, areas for pets, restaurants on site, and fitness centers as amenities. Also requested are electric car-charging stations, conference centers or large meeting rooms that occupy the common areas of a project, in hopes of lowering the amount of space that they need to occupy.

GlobeSt.com: What else should our readers know about Orange County's office-lease rates?

Holdner: The first thing tenants need to know is that rates are continuing to increase, and vacancy is still decreasing, even with new product being delivered-so we don't see that trend ending anytime soon. As long as there is job creation, lease rates will continue to increase. This, combined with the high cost of construction, will make the cost of occupying newer buildings much higher than occupying second-generation space. Bottom line, the buildings with the most amenities will command higher rents.

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