Bayview Corporate Center

ORANGE COUNTY-Already falling office rents here stand to slide even further as competition intensifies from buyers who have acquired office buildings at far lower prices lately than some of competitors paid at the top of the market. Average asking rates for all classes of space countywide approached $2.80 per square foot per month at their peak in 2007, but that average has now slipped to $2.25 and is likely to continue slipping for some time, according to brokers and others following the market.

Rreef Summit Buildings

“The numbers that some of these buildings are trading at today gives them a very competitive advantage in going out and chasing new tenants,” says Colby Annett, a co-managing partner in the Orange County office of Stream Realty, which recently won the leasing assignment for five office buildings totaling nearly 484,000 square feet owned by Rreef at the Summit Office Campus in Aliso Viejo. Annett, who is the leasing agent for the Rreef space along with co-managing partner Blaine Annett, tells GlobeSt.com that Rreef--which bought its buildings in 2004--can continue to meet the market as rents fall because its buildings are not saddled with the huge debt that burdens some office buildings in Orange County. But owners who paid $300 or more per square foot at the top of the market are having a hard time competing against new owners who have paid far lower prices.

Among the newest owners is Highridge Partners of Los Angeles, which bought the 246,819-square-foot, 78% leased 3 MacArthur office tower for $31 million or approximately $125 per square foot, compared with the $83 million and $336 per square foot that Tishman Speyer Office Fund paid for 3 MacArthur in 2007. Earlier this year, Irvine-based LBA Realty acquired the 1.7-million-square-foot Park Place project in Irvine after former owner Maguire Properties went into foreclosure on the property. Terms of the Park Place acquisition were undisclosed, but industry sources say LBA bought the property at a price per square foot that is well below what office deals were trading for at the top of the market. New owner S.K. Hart Properties of Salt Lake City recently bought the 332,000-square-foot and 75% vacant Bayview Corporate Center at 3501 Jamboree Blvd. in Newport Beach for $53 million, just under $160 per square foot, and the CBRE leasing team that recently won the listing for the property says that the new ownership will be very competitive on rents.

The Bayview Corporate Center “will be able to offer tenants highly competitive lease packages over the next 12 months,” says Jeff Morgan, a member of the CBRE leasing team for the 332,000-square-foot building. With nearly 250,000 square feet to lease, and an ownership ready to invest money in building improvements, the Bayview building will offer tough competition in the OC office market.

One of the effects of declining rental rates is a flight to quality, Colby Annett points out. “The in class B and C properties can now afford to be in class A properties,” he says, adding that the move up can improve image and increase efficiencies for tenants.

Increasing efficiencies is high on the list for many if not most tenants, notes Annett, who says that many tenants whose leases are up for renewal look to consolidate for that reason. A tenant who has 10,000 square feet in one submarket and 10,000 square feet in another submarket might want to consolidate into 15,000 square feet in a different location to achieve that efficiency, he points out.

For that reason, Annett adds, “We’re chasing deals all over Orange County" for the Aliso Viejo space that Stream is leasing for Rreef. He points out that, with most office leases running for five years, roughly 20% of the county’s tenants face lease expirations in any given year. Although overall demand has not been increasing and the county has been posting negative net absorption, he explains, there is action for office brokers because, “Companies that are downsizing and consolidating are looking for more efficient floor plates and higher-density type offices so they can get more people into less space.”

The declining rents that allow tenants to move up in class are detailed in the latest quarterly office market surveys by brokerage firms. CBRE points out that in addition to the overall decline in average asking rates, class A office lease rates dipped from $2.56 in the second quarter to $2.44 in the third quarter, while class B rental rates fell from $2.11 to $2.06 per square foot. A report from Voit Real Estate Services notes that in addition to lower rents, landlords are competing on the basis of increasing concessions such as free rent, reduced parking fees, relocation funds and tenant improvement allowances.

For new owners and for those with strong ownership unburdened by debt, Annett says, the name of the game is meet the market to keep and win tenants. For owners who paid top dollar, he says, the next few years will be very difficult.