Real Estate Forum - September 2011

Just look at 2050 Main St. and 11875 Von Karman, two office buildings in the heart of Irvine that traded in late 2009 and mid-2010 with significant vacancy. “These buildings are both newly constructed and very high quality, mostly in shell condition at the time of the sale,” says Fried. “Prior to the trades, the sellers didn’t have the additional capital to lease the space and the rental rates they were able to achieve didn’t make economic sense at their existing cost basis.” The new owners have attracted tenants with a reset basis and capital for tenant improvements, and both properties are now near stabilization.

However, many owners and landlords are also banking on the market’s eventual recovery to compensate for these large T.I.s and long periods of free rent, Fried points out. “In many cases they aren’t hitting their pro formas, because market rents have remained low due to the availability of options in the marketplace,” he says.

But local tenants also recognize that this is likely the bottom of the market. Therefore, they’re seeking to expand their businesses

“Institutional
demand for
value-add or
core office
investments
is driving the
market. Buyers are hoping
to stabilize occupancy as
soon as possible and exit
the property.”

DAN VITTONE

Voit Real Estate Services

Lease rates are down about 30%, so there is a migration to class A space, says Brian Childs, executive vice president and branch manager for NAI Capital Inc. in Newport Beach. “When this happens in our market, the tenants with leases coming up, or the bigger tenants that feel comfortable with their size, start going to the class A space,” to lock down lower rates at longer terms, he says. Since those tenants are generally upgrading, “class B is lagging behind class A right now.” He points out that class A rents have bottomed out and are stabilizing, while class B rates may still drop some before they level out, thanks to this migration.

Carnahan agrees, pointing out that, even as class B tenants move to A spaces, C tenants are migrating to B properties, with no real material change in overall occupancy rates. That, he says, is because “we’re still clearing some shadow space left over from the job losses of the past three years.” Earlier this year, Panasonic Avionics Corp. revealed growth plans at its corpo-

We make deals happen. or relocate to higher-quality properties and execute leases at cheap rents, Fried says. “This will fuel absorption in Orange County and, over time, lead to increased rents.”

For 50 years, we have counseled individuals and companies in a wide range of complex real estate transactions and in litigation involving office, industrial, residential, multi-family, hospitality, retail, and golf course properties. From acquisition and entitlements to lease-up and disposition—and everything in between— we have been instrumental in helping our clients build a better, greener future. Greenberg Glusker—a legacy on which you can build your foundation.