OC Office: Still a Tenants' Market?

IRVINE, CA-The tide is turning in favor of landlords, who are gaining confidence in office fundamentals and staying firmer in negotiations than they were a year ago, according to Jones Lang LaSalle. Over the past two years, the line that divides market leverage between tenants and landlords has become increasingly blurred, the firm reports.

As GlobeSt.com reported earlier this week, despite potential threats, several factors paint a positive picture for Orange County's office market, according to JLL. Positive job growth and a relatively low unemployment rate put the economy in a good light, and positive net absorption, an active construction pipeline and a flurry of sales transactions indicate strong fundamentals.

Average office rental rates are increasing almost across the board, and in most cases, tenants will now begin to see the distance grow from the point at which they had maximum market leverage to achieve favorable lease terms, the firm reports. A year ago, the market's recovery was much more segmented than it has become today.

Tenants that were interested in highly desirable class-A options were beginning to see leverage slip in 2012, but class-B tenants in secondary areas of the market still had significant power of negotiations with landlords, who were still coming to grips on when the market would stabilize, according to JLL. It now appears that the majority of landlords aren't as willing to concede due to the market's strength. Tenants can still take advantage of low rates in Orange County, but the time to do so is now, according to the firm.

From the landlord perspective, confidence seems to be a recent high at this point. Four years into the post-recession recovery, there are now several reasons to have faith that demand for office space is on the rise and will be sustainable for at least the foreseeable future, JLL reports. As such, landlords have become more rigid on concessions and holding steady on rental rates.

However, the market that is dominated by the presence of the Irvine Co. is still waiting for more-substantial rent growth to occur. Vacancy rates have improved and job growth has been consistent, so why have rental rates shown only marginal signs of increasing? Many believe that the uncertainty that plagued the market throughout the early phase of the recovery has tempered landlord aggressiveness, says JLL. If that is the case, expect to see companies with well-leased portfolios like Irvine Co. begin to push rates in the near term, which will in turn encourage the market to follow.

Landlords would also be wise to keep a close eye on the state of the mortgage industry and how it may impact the commercial-office fundamentals over the next six to 12 months, JLL reports.  Still, the newly diversified local economy and burgeoning tenant demand should bode well for owners over the next two to three years.