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Orange County Office Leases Pick Up as Owners Get Aggressive on Rents

Tuesday, March 9th, 2010

Office Leases Pick Up as Owners Get Aggressive on Rents

San Francisco-based Shorenstein Pro-perties LLC completed the largest office acquisition in Orange County for 2008 when it paid nearly $211 million for Irvine’s Main Plaza complex near John Wayne Airport—more than twice the price paid for any other local office complex that year.

Now the owner of the twin 12-story, Main Street building—a national investor that’s shown no signs of being in financial distress—is making news again in OC, with one of the more hard-hitting leases seen for a high-end office in Irvine.

SullivanCurtisMonroe Insurance Ser-vices LLC recently moved its headquarters to Shorenstein’s 1920 Main St. building, leasing 25,237 square feet of space. The insurance brokerage, which relocated from an older building down the street, also got its name on top of the building.

The seven-year lease is for $4.4 million, which puts monthly rents at a bargain-basement price of about $2.08 per square foot.

The lease is one of the most aggressive transactions to take place in the airport area in the past 18 months, according to Jake Stickel, a broker with the Newport Beach office of CB Richard Ellis Group Inc.

For similar higher-end offices around John Wayne airport, monthly asking rents have been running about $2.50 per square foot. Near the peak of the market, those rents were more than $3 per square foot.

“The rental rate the tenant was able to lock in at this class A property is comparable to the rent they were paying under their previous lease in a class B building,” said Stickel, who represented the insurance com-pany along with CB Richard Ellis Group Inc.’ Carol Trapani and Tasha Monroe.

Trend

Expect to see more eye-opening leases as existing and new property owners in OC look to weather the ongoing slow office market, tenant brokers said.

Local owners with strong balance sheets, including Newport Beach’s Irvine Company—and presumably Shorenstein—would rather fill up their buildings now at below-market rates than continue seeing their buildings remain empty during what’s expected to be a slow recovery for the local market.

Meanwhile, owners that bought distressed properties in the last year at steep discounts are hoping to leverage their cash positions to make deals that other financially-strapped landlords can’t afford.

“It’s a tenants’ market, as everyone knows,” said John Tumminello, principal for Newport Beach-based investor Greenlaw Partners.

Late last year, the company partnered with San Francisco-based Westbrook Partners and Chicago’s Walton Street Capital LLC to buy Irvine’s 2050 Main St. office tower.
Source: www.ocbj.com

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Are you losing money? – 10 Common Pitfalls for Commercial Tenants to Avoid

Friday, March 5th, 2010

“Are You Losing Money?” 10 Common Pitfalls for Commercial Tenants to Avoid

Although reading a commercial lease can be difficult and time-consuming, the consequences of not reading can be infinitely more unpleasant. Tenants frequently will only look at the provisions that have direct economic impact. There are, however, provisions buried in the lease which may have unintended impact on the tenant. While a tenant’s ability to delete or modify these objectionable provisions will depend on a number of factors, including, among others, the size and reputation of the tenant, market conditions, the vacancy level of the building, the size of the space and the length of the lease term, every tenant should make an effort to ameliorate the effect of these pro-landlord terms. Some of these provisions are explored below.

1. Common Area Maintenance (“CAM”) Expenses (also known as “Operating Expenses”):

Landlords may try to use this provision as a “profit center.”

• An Operating Expense or CAM provision requires the tenant to pay its pro rata share of the operating expenses incurred by the landlord in the operation and maintenance of the building. Unfortunately, landlords have expanded the list of expenses to include every imaginable expenditure. By doing so, some landlords have turned this provision into a profit center. Instead, the provision should only pass through to the tenant legitimate expenses relating to the operation and maintenance of the common areas.

• The tenant should carefully review the history of the building’s CAM charges for at least the three prior years. This will enable the tenant to compare the amount of operating expenses and their annual increases to other comparable buildings to determine whether they are reasonable, and to estimate what the charges might be in future years.

• The CAM provision should be rewritten so that only “legitimate” CAM charges are included and items such as capital improvements and compliance with laws are excluded. Most landlords will accept what has become known in the industry as a standard list of operating expense exclusions.

• Particular attention must be given to the definition of the base year in any CAM clause which requires the tenant to pay its prorata share of expenses incurred over a base year. The tenant should make certain that the tenant has no obligation to pay for expenses during the base year and that the base year variable expenses are subject to a “gross up” to reflect the full amount of operating expenses that would have been incurred by the building had it been 100% occupied.

• Watch out for any provision making the landlord’s determination of CAM charges final. The tenant should reserve the right to audit the landlord’s expenses and to review the landlord’s calculations.

• Review the operating expenses clause against the compliance with laws, repair and maintenance and real property tax clauses to prevent the landlord from passing through to the tenant expenses which it may have solely assumed under these and other clauses.

• Alternatively, if the situation permits such negotiation, attempt to insert a maximum upper limit (“cap”) on CAM charges, or a “kick out” clause allowing the tenant to terminate the lease if CAM charges exceed a certain amount.

2. Repair and Maintenance Provision:

Landlords may try to use this provision to require the tenant to repair and maintain areas located outside the leased premises.

• There are great distinctions among the clauses that define the tenant’s obligations under the lease with respect to repair and maintenance.

• The tenant must pay particular attention to any repair and maintenance provision that requires the tenant to repair and maintain items or areas that are traditionally the landlord’s responsibility.

• A typical lease will define repair and maintenance obligations with reference to the interior of the premises. However, depending on the definition of the premises, this may result in the tenant’s having to repair and maintain such things as plumbing, sprinklers, HVAC ducts, and the building’s structural elements.

• It is imperative that the tenant limit its repair and maintenance to the interior surfaces of the leased premises, excluding any structural elements or building systems located therein.

• Define exactly the extent of the tenant’s repair and maintenance obligations, taking care to exclude items such as regular wear and tear or items that are covered by the landlord’s property insurance.

• If the landlord is to be held responsible for the repair and maintenance of certain items, the lease must be specific about these items so that there is no doubt as to which party has responsibility.

• Finally, the tenant should try to make certain that the costs of the repair and maintenance for which the landlord is responsible cannot be passed on to the tenant, through, for example, the operating expense provision.

3. Real Property Taxes:

An unsuspecting tenant may find itself paying real estate taxes and special assessments for a period beyond the expiration of the lease.
• The real property taxes provision defines the respective obligations of the landlord and tenant for real property taxes. Landlords have expanded the definition of real property taxes to include any type of tax assessed against the property, the landlord or for doing business and are increasingly defining taxes to include future taxes of any sort, including rent taxes or income taxes.

• Define precisely which taxes and/or assessments are to be included in the definition of real property taxes and be sure to exclude federal or state income, franchise or estate taxes.

• Make certain that the tenant’s tax and/or assessment responsibilities do not survive the tenancy. That is, if, for example, a three year installment for assessments becomes due at the commencement of the last year of the tenancy, the tenant should be responsible only for its pro rata share of the total amount (i.e. one year).

• The tenant should be aware that its tax liability may increase dramatically if the landlord sells the property, particularly if the landlord has held the property for a long time and property values have greatly increased. The tenant may wish to put some limitation on increases in real property taxes resulting from a change in ownership by, for example, having increases occur incrementally over time or completely eliminated.

4. Compliance with Laws:

A tenant not appreciating the potential effects of this provision may find itself footing the bill for earthquake retrofitting, asbestos abatement, sprinkler installation, or compliance with the Americans with Disabilities Act.

• This provision typically requires the tenant to perform potentially expensive replacements, alterations, or improvements of the leased premises to comply with existing or future laws and government orders relating to the leased premises.

• In some instances the landlord agrees to bear the burden of complying with these laws or the lease places the onus to comply with such laws directly on the tenant.

• In either case, it is the tenant who, depending on the particulars of the situation, may have to foot the very substantial bill for items such as asbestos abatement, retrofitting or compliance with the Americans with Disabilities Act.

• If the landlord is to bear the responsibility, the tenant must curtail the landlord’s ability to “pass on” the cost of compliance through other provisions, such as the operating expense provision.

• If the tenant is to be responsible for compliance with laws, the landlord should represent and warrant to the tenant in the lease that the building is in compliance with all presently-existing laws and limit its responsibility for compliance with future laws to those items necessitated solely due to the tenant’s particular use of the premises.

•The tenant should try to place a cap on its annual exposure under this provision.

5. Assignment and Subletting:

Asking the landlord for permission to assign or sublet the premises may give the landlord the ability to terminate the lease.

• In the typical commercial lease, the landlord requires the tenant to get the landlord’s consent prior to any assignment or sublet.

• Negotiate several exclusions from the consent requirements, including assignment or sublet for reorganization purposes and space-sharing arrangements up to a defined square footage (the latter has particular application to office leases or retail leases where the business is seasonal).

• Where the lease requires consent and the landlord consents to an assignment or sublet, the landlord may get to keep all rents paid by the assignee or subtenant in excess of the tenant’s fixed rent obligation to the landlord. The tenant should ask for at least a portion of this “excess” rent.

• Furthermore, it is imperative that the tenant have subtracted from the “excess” the book value of leasehold improvements made for the assignee or sublessee and any broker’s commissions paid by the tenant in locating the assignee or sublessee. Not doing so may severely overstate the excess rent and can result in a windfall to the landlord.

• In the absence of a release, the tenant will continue to bear the economic risks of paying the rent and all other charges under the lease for the balance of the lease term, including any existing options to to extend or renew (“Options”) following an assignment. The tenant should attempt to get a release of liability for the Option periods.

• Carefully review the lease to determine whether it contains a recapture clause. Under a recapture clause, a request by the tenant that the landlord consent to an assignment or sublet triggers an option enabling the landlord to terminate the tenant’s lease. The tenant should have the recapture clause deleted or should insert an option allowing the tenant to withdraw its request if the landlord elects to terminate the lease.

• Insert a clause that requires the landlord to give the tenant notice of any default following an assignment so that the tenant will have the right, but not the obligation, to cure the default and regain possession of the premises.

6. Subordination, Nondisturbance and Attornment (SNDA) Provision:

If the landlord asks you for what amounts to a favor for the benefit of its lender, the tenant should be sure to get something in return.
• This provision defines the important relationship between the landlord’s current and future lenders and ground lessors, and the tenant in the event the landlord defaults on its loan obligations or obligations to the ground lessor. A subordination clause typically readjusts the priorities that normally would result from general legal rules, by providing, for example, that any existing or subsequent lender of the landlord can elect to deem its deed of trust superior or junior to the lease, regardless of the date on which the lender’s deed of trust was recorded. An attornment provision generally obligates the tenant to recognize the foreclosing lender or ground lessor as the new landlord under the existing lease.

• In exchange for its subordination and attornment agreements, the tenant must assure continuation of its lease by requiring the landlord’s lender or the ground lessor to agree not to disturb the tenant’s lease if the lender forecloses or the ground lessor asserts its right to the property. This becomes especially important to a tenant in a market with little inventory and escalating rental rates. Without a nondisturbance clause tied to the subordination and attornment provisions, the tenant’s lease could be wiped out by virtue of the subordination provision.

7. Tenant Remedies (Termination and Abatement Rights):

A lease containing waivers of tenant remedies may leave a tenant with no place to turn if the landlord defaults in its obligations.

• This clause defines what, if any, remedies are available to the tenant in the event of a default on the part of the landlord.

• Many commercial leases cause the tenant, by accepting the terms of the lease, to waive a host of remedies provided by the law. Other leases fail to mention tenant remedies entirely.

• When negotiating a lease, ideally the tenant would like to preserve its “repair and deduct” rights so that if there is a problem, the tenant can remedy the problem and deduct the cost from its rent; in most cases the landlord will require a waiver of this right.

• A tenant should, therefore, negotiate a lease which contains abatement and termination rights.

• Abatement rights allow the tenant to abate, in proportion to the area of the premises affected, the amount of rent it pays if the landlord fails to remedy items for which it is responsible that interfere with the tenant’s use of or access to the leased premises.

• Termination rights may give the tenant the option, under the above circumstances, to vacate the entire premises without further obligation.

8. Termination, Relocation or Expansion Rights:

A tenant who has not had its lease carefully read may be surprised to learn that the landlord has reserved the right to unilaterally terminate the lease or relocate the tenant.

• A termination provision in favor of the landlord allows the landlord to unilaterally terminate the lease, usually on the occurrence of some condition.

• A re-location provision allows the landlord to relocate the tenant to other premises within the building.

• An expansion provision, on the other hand, may give another tenant the right to expand into the tenant’s premises and may allow the landlord to terminate the tenant’s lease or relocate the tenant.

• Ideally, a tenant should not agree to such clauses.

• If conditions require acceptance, the tenant should make certain that it can only be relocated to a comparable location and position and that the landlord has to pay for all expenses related to the relocation, including the cost of moving the business and installing tenant improvements.

9. Damage and Destruction:

A trap for the unwary.

• This provision provides what will happen if the leased premises or the building housing the leased premises is damaged or destroyed. It typically provides that the landlord may elect, in its sole discretion, to continue the lease or to terminate it. In the case of continuation, it usually provides for an abatement of rent in the same proportion that tenant’s use of the leased premises is impaired.

• The tenant must make sure that the abatement of rent language is fair. Some leases base it on the amount of square footage of the leased premises that is damaged or destroyed. This is unfair since sometimes the entire leased premises may not be useable even where the damage is to a small area.

• The ability to terminate should reside in both landlord and tenant. Otherwise, the tenant may find itself bound to a lease under which it is unable to use the leased premises for a significant time. This can throw a real wrench into any tenant’s business plans.

• Beware of provisions that make the tenant liable for rent if the damage or destruction results from the negligence of the tenant. Why should the tenant remain liable if the landlord has business interruption insurance, or other similar insurance?

• Watch out for provisions that allow the landlord to terminate the lease if the damage or destruction occurs within some period of time (typically the last two years of the lease), and that allow the landlord to invoke the provision where the damage or destruction is to other buildings comprising the project but not effecting the leased premises.

• Make sure the tenant retains the right to complete your improvements following the landlord’s repair or reconstruction before your rent obligation resumes.

10. Tenant Improvements:

Now you see them, now you don’t. If improvements are to be made to the leased premises prior to the tenant’s occupancy, the tenant must understand the economic impact of such improvements and know what it will get.

• Make certain that the obligation to pay rent and other charges do not begin until the tenant improvements are complete.

• Determine whether the landlord will be designing and constructing the tenant improvements at its sole cost (a “turnkey” arrangement) or whether the landlord will be giving the tenant an allowance, with either the tenant or landlord designing and constructing the improvements (an “allowance” arrangement).

• Before entering into the lease, in an allowance arrangement, the tenant should have final space plans and estimates for the work so that the tenant is not exposed for the cost of improvements in excess of the landlord’s allowance or, at the very least, will know how much it will have to pay.

• In both turnkey and allowance arrangements, the tenant must be certain to work with a competent broker and space planner to make certain that the space will be built out to satisfy the tenant’s needs.

• Where the landlord does the design work, reserve the right to look at, review and approve all designs and materials utilized, and the right to make changes up through the design stage of the tenant improvement design documents.

• Additionally, in an allowance arrangement, make sure that the allowance will not be used up for base building work, such as bathrooms located in common areas, asbestos abatement, or sprinkler systems.

• Agreement should be made as to the disposition of the landlord allowance if the actual tenant improvements cost less than the allowance. The landlord would like to keep the unused portion of the allowance, but the tenant should attempt to get the landlord to apply the allowance to the costs of other work that is the responsibility of the tenant under the lease or work letter, pay it to the tenant, off-set it against future rent, or allow the tenant to use some portion of it.

• Negotiate remedies for landlord-caused delay and carefully define and limit the consequences of tenant-caused delay.

Source: Robert C. Nicholas, Esq., Partner, Haas & Najarian

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The Definitions of Class A, Class B and Class C Office Space

Wednesday, March 3rd, 2010

One very common question clients ask us is “What’s the difference between Class A, Class B and Class C office space”, so I thought I should explain.

Commercial office space is typically categorized as Class A, Class B, or a Class C. The difference between these classifications does vary somewhat according to the local market and class B and C buildings are generally classified relative to Class A buildings.

Office buildings are bunched into these classifications according to their quality, amenities and general characteristics, but most differentiating factor between each three classes is that of price.

While there is no definitive formula for accurately classifying office space as the interpretation of the classes is somewhat subjective. However, below is a general description of each class:

CLASS A
Class A office buildings are the most prestigious and high-image office buildings in their marketplace with the best construction, competing for premier office users with rents above average for the area. Typically at least several stories high and accompanied by parking structures, Class A office buildings have high quality standard finishes and infrastructure, state of the art systems, exceptional accessibility and amenities and a definite market presence. Class A office buildings are also well-located, have good access, are professionally managed, and typically owned by institutional landlords. Class A office buildings are, not surprisingly, the most expensive. Currently, Class A office space in Orange County is typically leasing for as low as $1.80 per square foot full service gross up to over $4.00 per square foot full service gross.

CLASS B
Class B office buildings are typically low-rise versions of Class A office buildings, but lack the high-image and level of amenities and features, such as covered parking, that Class A office buildings have. They are generally well located and well managed and, compete for a wide range of tenants with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building cannot compete with Class A at the same price. However, Class B office space is generally considered the Currently, Class B office space in Orange County is typically leasing for as low as $1.50 per square foot full service gross up to over $2.00 per square foot full service gross and is generally considered the “best value” office space.

CLASS C
Class C office buildings typically encompass every building that does not fit into Classes A and B. Class C office buildings are low rise, often wood construction, older buildings, often located on the periphery of major commercial office centers. Class C office buildings often require extensive renovation due to their age and suffer from a degree of obsolescence in their infrastructure, which may not be suitable for certain tenants. They compete for tenants requiring functional space at below average rents that are so concerned with image or curb appeal. Currently, Class C office space in Orange County is typically leasing for as low as under $1.00 per square foot full service gross up to over $1.50 per square foot full service gross.

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Orange County Industrial Real Estate Market Summary by Kurt Strasmann of Voit Real Estate Services

Wednesday, February 17th, 2010

Kurt Strasmann, Managing Director of Brokerage Services at Voit Real Estate Services, is speaking on the Orange County Industrial Real Estate Market at the IREM (Institute of Real Estate Managers) Conference today.

Here is an overview of what he will be discussing:

1. Vacancy is at 6% currently and we expect vacancy to move up to around 6.75 to 7% by year’s end. Starting in 2011 we expect the vacancy to slowly start moving down again. To give you a perspective the low in vacancy was in the 3rd quarter of 2007 at 3%. Right now the average down time for a vacant building is approx. 12.2 months

2. Availability rate – includes direct vacancy and all sublease availability and is a good indicator of where vacancy is headed. Right now it is at 10.85%. We expect it to hold steady, maybe inch up to 11% and slowly come down by year’s end. Again the low was in 3rd quarter of 2006 at 4.35%

3. Net Absorption: 2009 was an extremely difficult year with approx. 5 million sqft of negative absorption. We see a negative absorption in 2010 by approx. another 1 million sqft. To give you a perspective from 2005- 08 we had an average of 1.25 million sqft. of positive absorption. The high was in 2004 with over 5.5 million.

4. User asking lease rates: Currently the average asking lease rate is $.59 NNN down from the high of $.80 NNN in Jan of 2008- 2 years ago. We see another 5 to 10% maximum downward pressure on rents through the end of the year. Keep in mind these are asking rents, thus effective lease rates are approx. 10-15% off these numbers.

5. User asking sale prices: Currently the average asking sales price is $101 per sqft down from $150 per sqft in Jan of 2008. About 33% decline. We expect to see another 10% decrease in sale prices unless an onslaught of distressed assets hit the market where we potentially another 20% reductions. Again these are asking prices. Sales have been few and far between and generally are far below the average asking price.

6. Investment Market: For stabilized in place market rents on quality assets we see cap rates at 7.5%. For Class B and C product we see cap rates in the 9-10% range. By comparison in 2006 and early 2007 cap rates got down to the 5.5 % range.

7. Future Activity: Activity has increased and it is becoming steady. Private companies and larger corporations are finally making decisions and get deals done vs. last year at this time when nothing was being done. We see this trend slowly increasing as people get used to conducting business in this environment. We are still at least a year away from having any pressure for price appreciation. –Simple too much supply.

8. Distressed Assets: On the industrial side, not much to look at this point. We do see this picking up in the second half of the year. Interesting to note when quality assets are priced aggressively there is no shortage of buyers. Multiple buyers emerge at the right price.

9. Best Opportunities:

a. Users looking to buy or lease product. We are near the bottom and 2010 should be near the low point. If a quality asset comes up that is priced to the market, there is great financing and with no new construction in place – very limited downside. Need to hold 5-7 years
b. Leasing – great time to move up in quality of product and lock in great lease rates for 5 years.
c. Investors- if you can buy at market rents- terrific long term opportunities. We just have not seen much available for sale. Watch out for the class B and C product because vacancy will be very tough.
d. Note Sales- we have seen a few opportunities here and hope note sales will emerge more on the industrial side. The problem is finding a lender that has written off the asset and has priced the note for a market sale.

10. Key indicators to watch:

a. Job Growth: 2009 was negative in OC of 49k 2010 is predicted to have 1,500 positive job growth 2011 should start to see better numbers.

b. Consumer confidence: slowly moving up from the lows of Jan 2009.
c. Retail Sales: low was in Nov 2008 and it has slowly moved up.
d. Port Traffic: LB/LA numbers are still off by 30% but they have increased since the lows of Jan 2009.

Forecast: 2010 will be better than 2009 for everyone. Slow and steady recovery – kind of an L shape recovery. All Four indicators are moving in the right direction, but at very slow pace.

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Timing the Orange County Real Estate Market – 6 Reasons to Buy an Office Building for Your Business

Wednesday, February 17th, 2010

Timing the Orange County Real Estate Market – 6 Reasons to Buy an Office Building for Your Business

“Why didn’t I see that coming?’ This is what many business owners say to themselves when an opportunity has past them by. In a turbulent economy, when the future is unknown, there are always missed opportunities, causing company executives to postpone long term decisions, and it’s not until they look in the rear-view mirror that they realize they should have pulled the trigger. Each market cycle has its own unique aspects, but the result is generally the same – time is the main variable. With that being said, there are compelling reasons to believe that the timing is right for business owners to purchase a new building in Orange County.

If a company’s earnings are stable and its business plan has put it in a position to occupy the same size property for the next five years or more, purchasing a building could be the smartest business decision of 2010. As a result of the pricing in the market, the “lease versus own” scenario is coming back into alignment and buying a building is a smart investment choice once again.

For those businesses that fit these criteria, here are six reasons why now is the time to do so:

Reason #1: Prices have already declined in most markets by approximately 25 percent to 40 percent and buildings can now be purchased well below replacement cost.

The current sales taking place in the market are closing escrow 25 to 40 percent off peak values. In most cases, prices are back to their 2004 levels. Properties that have not sold linger due to sellers not being realistically priced in today’s market, but many of them are taking a harder look at their properties with an eye toward price reductions.

Replacement cost is a key component in real estate decisions and is a main factor for the most sophisticated real estate buyers. Buildings can currently be purchased well below replacement cost, allowing businesses to make the smartest investment possible.

Reason #2: There is excellent SBA financing available.

The SBA loan program has not been affected by the financial crisis, and the government is offering discounted fees. Businesses interested in purchasing a property can fix their occupancy costs for five to ten years at a record low interest rate (below six-percent). Not only is SBA financing inexpensive and easy to qualify for, but these loans only require 10 percent down.

If a business has the down payment for the property, it should qualify for this government-backed loan because there is an abundance of available capital and banks are interested in funding these comparatively low risk loans. These loans are preferred by banks because their portion of the loan is only 50-percent loan-to-value and is senior to a 40-percent government bond, making the bank’s risk relatively low. Many small businesses believe there is no money available for loans due to the current financial crisis, but banks continue to offer SBA loans to solid companies wanting to fix their occupancy costs. Also, for a short period of time, the government is significantly discounting the fees.

Furthermore, with inflation and interest hikes expected within as little as 12 to 18 months, the window of opportunity to secure favorable loan terms is now limited. Just one percentage point increase in the interest rate on a loan will have a significant impact on the total purchase cost, potentially amounting to tens of dollars per square foot. So don’t just focus on price. Look at the bigger picture!

Reason #3: The “lease versus own” scenario is back in line.

By buying a building, businesses can fix their occupancy costs for up to 10 years. As their own landlord, businesses will not have to speculate about future lease rates, when leases come up for renewal and owners raise rates to current market values. As the market has shown previously, lease rates will rise and landlords will have their day again.

Reason # 4: Orange County still has great fundamentals.

Orange County commercial real estate fundamentals for the long term are still very good and appreciation will return for owners who purchase space below replacement cost. As history has proven, as the economy recovers and rental rates increase back to record rates in the future, businesses that purchase their own building with fixed rate financing will benefit.

Reason #5: With a large inventory of buildings to choose from, businesses can find the right property and location.

With vacancy rates up and demand for space down, there are more buildings for sale to choose from. Buyers have the opportunity to locate properties with the exact features their businesses need and pay a lower price for them. In a market where sellers had the advantage, businesses were being forced to pay a higher price and compromise on quality. Today, buyers can get a superior price point on a building that better fits their needs.

The current market also allows businesses to negotiate the terms of the sale without the pressure of multiple offers. When the market was booming, properties were in escrow within 30 days, which did not allow sufficient time for negotiation. With today’s high inventory, buyers can now find the right building for their business needs at very favorable terms.

However, we expect to see stabilization in the owner/user office sales market in 2010 and are already see signs of less owner/user office buildings coming up for sale and a steady increase in buyer activity. As the inventory diminishes, so will the opportunity for businesses to buy a building that fits its exact needs.

Reason #6: Commercial real estate cycles typically follow residential and the residential market appears to have bottomed out in some sectors.

The residential market in Orange County appears to be showing signs of improvement, after establishing the bottom with prices that were approximately 40 percent lower than peak values in some submarkets. In these submarkets, residential prices have recently stabilized and are starting to creep higher.

3 important recommendations:

1. Allow plenty of time! The site selection, buying and loan qualifying process can take a long time. When contemplating such a long term commitment and substantial expenditure, don’t risk having to make short term decisions. We typically recommend clients to allow at least 12 months to complete the process to ensure the best results.

2. Hire an expert. If you are not intimately in tune with the latest market data, sale listings, off-market sale opportunities and sale comps and are not experienced in buying commercial real estate, hire a real estate broker to represent you. On most office listings the commissions are paid in full to the listing broker if you are not represented and the listing agreement prevents all or part of the fee from being renegotiated back into a purchase price discount. The benefits you receive from your own real estate broker representative will likely result in a reduction in cost several times the full commission paid if you’re broker is an expert in your marketplace/product type.

3. Don’t wait for the market to hit bottom. If you do, you’re too late. Most substantive data on market and submarket trends isn’t qualified and recognized as a definitive trend until 1-2 quarters after the fact. Learn the market and be proactive in order to time the market perfectly. We are already very close to the bottom!

4. Consider your options. Most of our clients want to buy. Most of them can’t. Most of them don’t realize this until they’ve spent months exploring buying opportunities. Don’t overlook leasing as an alternative. It requires significantly less up front capital expenditure and provides the operational flexibility for your business that a small building can’t afford. Today’s office leasing market offers plenty of opportunities for tenants to fix their occupancy costs at record lows for 5 years without having to buy.

For professional advice, market intelligence, a lease vs. buy analysis, financing options and scenarios and sale listings and off-market opportunities, contact Stefan Rogers at 949.263 5362 / srogers@voitco.com.

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How Far Have Orange County Commercial Real Estate Sale Prices & Rents Fallen From The Peak?

Tuesday, February 16th, 2010

Voit Real Estate Services’ Head of Research, Jerry Holdner, has prepared the following analysis showing how far Orange County commercial real estate prices and rents have fallen since their peaks:

Sale Prices
Orange County Industrial – High 1Q08 = $153.05; Today = $101.33 – Down 33.79%
Orange County Office – High 3Q08 = $309.25; Today = $145.74 – Down 52.87%

Sales Activity (Volume)
Orange County Industrial – High 2004 = 20.5 Million sf, 2009 = 13.2 Million sf – Down 35.61%
Orange County Office – High 2004 = 20 Million sf, 2009 = 7.8 Million sf – Down 61%

CAP Rates
Orange County Industrial – Low = 2006 6.44, 2009 = 8.5 -Up 32%
Orange County Office – Low 2008 = 4.97, 2009 = 7.2 – Up 45%

Asking Lease Rates
Orange County Industrial (NNN) – High 1Q08 = $.80; Today = $.59 – Down 26.25%
Orange County Office (FSG) – High 3Q07 = $2.77; Today = $2.17 – Down 21.66%

Leasing Activity
Orange County Industrial – 2007 = 10,457,351, 2008 = 10,138,476, 2009 = 11,695,331 – up 15.36% over last year; this is due to a lot of short term deals in the past 24 months
Orange County Office – 2007 = 7,379,004, 2008 = 8,296,099, 2009 = 8,821,579 – up 6.33% over last year

Vacancy Low to today
Orange County Industrial – Low 3Q07 = 2.86%; Today = 5.46% stabilizing – Up 91%
Orange County Office – Low 4Q05 = 7.24%; Today = 18% and rising – Up 150%

Availability Rate – vacant and sublease space combined
Orange County Industrial – Low 3Q06 4.35%; Today 10.84% and dropping – Up 150%
Orange County Office – Low 3Q05 8.5%; Today 21.31% and rising – Up 150%

Annual Net Absorption
Orange County Industrial – 2006 = 1.25 Million sf, 2007 = 1.4 Million sf, 2008 = 20,000sf, 2009 = negative 5 Million sf
Orange County Office – 2006 = 500,000sf, 2007 = 825,000sf, 2008 = 900,000sf, 2009 = 2.9 Million sf

Size of Market
Orange County Industrial – 9,485 properties – Totaling 250 Million Square Feet
Orange County Office – 1,501 properties – Totaling 110 Million Square Feet in buildings above 25,000sf

Current Unemployment in Orange County 9.1%, peak was 9.8% in August 2009

Orange County covers 948 square miles with a population of 3.1 million people

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Good Advice on How a Commercial Tenant Representation Broker will Save You Money

Friday, February 12th, 2010

Your primary business is running your company. How often do you lease office space? Hopefully, you don’t have to do so more than every 3 to 5 years or so; the same with lease renewals.

The bottom line is that you rent office space only a few times in your business life. Landlords on the other hand rent space over and over again. In most cases, they even hire a listing agent to help market the property and advise them. Do they have an unfair advantage? You bet they do. How do you balance this unfair advantage? Engage the services of your own qualified tenant representative.

Many tenants have a fear that by engaging the services of a tenant representative they will end up having to pay more in rent so that the landlord can pay the tenant representative. I am sure you have heard the sales pitch from an agent that engaging a tenant representative doesn’t cost you anything. The response I hear to this is “the landlord tacks on the fee on top of the lease rate.” So, who is right?

When it comes to negotiating for office space, there is no question that a good tenant rep will not only save you money, but will also make sure you don’t make any critical mistakes.

Not to mention, there is usually already a real estate fee built into the asking price. This is paid whether or not you have representation. Typically, what happens is that the fee, usually 4% to 6% of the gross lease amount, is split between the tenant representative (leasing agent) and the listing agent. There really is no additional fee tacked onto the lease rate and you won’t save anything by not having representation. The listing agent, who represents the Landlord – no matter what they tell you – will get the whole thing.

What about lease renewals? Should you also engage the services of a tenant rep? Absolutely! How a tenant representative gets paid on a renewal is negotiable. Should they be paid a full fee on a renewal negotiation? The answer depends on how much work is involved. If is just a matter of going out and doing a market survey then negotiating the deal, they probably don’t deserved a full fee. Most tenant reps will work as consultants either hourly or for a predetermined flat fee. On the other hand, if you want to consider other alternative locations, request proposals and do some preliminary negotiations on other properties, it is justified. It is a comparable amount of work that would have to be completed if you were moving. Or at least a half of a fee is justified, the leasing side of a commission.

How will a tenant rep save you money?

The leasing process is generally complex. After labor costs, your investment in office space may be your most expensive line item and decisions you make will have an impact on your company’s profitability. The tenant representative is your guide through the process.

Market knowledge is a key ingredient in which a qualified tenant representative can make a big difference. Having a grasp on asking rates versus deal rates and incentives available is important to make sure you get the best terms available.

A qualified tenant representative understands the numbers and is able translate data into implications for your business – advice on growth strategy within a particular building or market, for example. Tenant representatives are also able to perform financial analysis to help you select the most cost effective location.

Expert negotiation skills are critical for a favorable outcome. Representation gives you subtle leverage during negotiations, informing the landlord that you are professionally represented and undoubtedly advised of alternative sites and comparable lease rates. As an added benefit, a tenant representative may know the temperament of a particular landlord and/or landlord’s representative, and recognize how far to push the negotiations without jeopardizing the transaction. This is a definite advantage when it comes to lease renewals, too.

Familiarity with the documents is a must. Tenant representative have a working knowledge of the documents necessary to conduct the transaction. These documents include requests for proposal, letters of intent, lease agreements and workletters and vary from market to market. A tenant representative knows how to customize the documents to meet your needs.

A few important questions to ask and receive acceptable answers when you look for a tenant representative:

1. Are you free of any conflicts of interest if we work together?

2. Are you a primarily tenant advocate or a listing agent?

3. Do you have time to work on this project?

4. What other projects are you currently working?

5. What is your experience in finding properties like mine?

6. How many tenant representation transactions have you handled in the past 3 years?

7. What is your negotiating philosophy?

8. Are you knowledgeable about market conditions?

9. How do you handle conflicts of interest, such as when you show me space that you or your company represents on behalf of a landlord?

10. How would you describe your reputation in the business community?

11. Can you supply references?

12. Do you work with an Exclusive Representation agreement?

13. What happens if I’m not happy working with you?

14. How do you get paid? What commission you expect to receive?

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Need to Know Considerations For Timing Your Office Space Move

Thursday, February 11th, 2010

Searching for office space is difficult enough. Allowing enough time to complete the leasing process is another matter. Identifying a new office space, negotiate a lease, and manage any tenant improvements and the relocation process always takes longer than you think!

A typical relocation work schedule can be accelerated and compressed depending on the depth of construction required and the streamlining of real estate related assignments and services. Choosing a well qualified tenant representation broker who can in turn advise you on the right set of buildings on the front end is critical to meeting any schedule.

Below is a good timeframe to follow for for small to medium office space lease transactions:

Month 1: Define the Requirement

• Define space requirement and location parameters
• Sample space diagrams and adjacency planning.
• Establish timing and required milestones.
• Vendor selection process.
• Select real estate broker.
• Review representative buildings available.

Month 2: Create Options

• Initial building tours financial analysis.
• Space programming and test fits.
• Further budgeting for anticipated outcomes.
• Select other vendors required.
• Review representative buildings available.

Month 3: Negotiate the Best Deals

• Short list of properties.
• RFPs to building landlords.
• Due diligence of building candidates.
• Further budgeting and financial analysis.
• Management discussions and approvals.
• Final term sheet negotiations.
• Final vendors selected.

Months 4-5: Design and Build

• Obtain management approval and execute lease.
• Construction drawings.
• Obtain permits.
• Award vendor contracts.
• Vendor coordination.
• Start construction.
• Procurement of equipment and services.
• Review representative buildings available.

Months 6-9: Construction – Move In

• Telecommunication and IT activity.
• Installation of furniture, trade equipment and leasehold fixtures.
• Construction punch list.

Outsourcing the real estate process to a qualified tenant representation broker is essential to ensure the leasing process is managed efficiently, and to save the maximum amount of time and money while minimizing your exposure to real estate risk.

For further information or advise on the office leasing process, call Stefan Rogers at Voit Commercial Tenant Solutions at 949.263.5362.

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Early Office Lease Renewals Trending Upwards in Orange County and San Diego County

Monday, February 1st, 2010

All the latest market data indicates that the Orange County and San Diego office leasing markets have or are about to reach bottom and we are witnessing a sharp increase in early lease renewal activity as a result.

Over the past two years landlords have preferred to sign short term leases so they can hit tenants with a sharp rental increase in 12-24 months time. However, with many landlords needing to combat high vacancy rates in their buildings, many are yielding to the pressure from savvy tenants looking to renegotiate their leases early in order to lock in today’s record low rents before they increase. Significantly reduced overhead and fixing long-term occupancy costs is the key driver for tenants in the current market.

Office rents have fallen as much as 40% off their peak, so if a tenant signed a lease in 2005, 2006, 2007, or even 2008, chances are they are paying significantly more than they should be. Fortunately, there is a quick and easy solution available for tenants to reduce their occupancy costs in line with today’s market and realign their office space with their business plan for the long term, both financially and physically – the early lease renewal.

Many tenants are unaware that landlord’s will consider an early lease renewal as much as three years prior to lease expiration, in attempt to boost occupancy levels in their buildings and maintain long-term cashflows. In such an event, not only can tenants achieve total occupancy savings of as much as 40% but they can secure much needed tenant improvements, lease additional space and recieve substantial rent abatement upon lease execution.

Voit Commercial Tenant Solutions is currently working with a large number clients to evaluate their corporate real estate needs and analyze the benefits of an early lease renewal. With the use of our proprietary “Blend & Extend” Lease Analysis Software, we can quickly determine the total cost savings to a tenant in three easy steps.

For more information and a no-obligation Blend & Extend Analysis, contact Stefan Rogers in Voit Real Estate Services‘ Irvine office(949.263.5362) or Jon Hamby in Voit Real Estate Services’ San Diego office (858.458.3357).

The typical results an office tenant caxamples of this include

Voit Commercial Tenant Solutions has developed a solution whereby tenants can remain in their existing space, lower their lease payments immediately, and carry that savings into a longer term than they currently had!

For more information on early lease renewals or “Blend & Extend” programs, call us directly at (858) 458-3357.

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4th Qtr 2009 Orange County Office & Industrial Real Estate Market Reports Just Released!

Tuesday, January 12th, 2010

Orange County Office and Industrial commercial real estate is stabilizing

Voit Real Estate Services has just released it’s latest 4th quarter 2009 commercial market reports for the office and industrial real estate sector. Voit’s 2010 Commercial Real Estate Market forecasts and a complete list of reports for Office, Industrial, Flex, R&D and Retail commercial real estate for Orange County, San Diego County, Riverside County and Las Vegas are available on www.voitcts.com. Click HERE to view the reports.

Highlights for the Orange County Office Market are:

Vacancy – Up
Net Absorption – Down
Lease Rates – Down
Transactions – Down
Construction – Up

While the above trend is similar to that witnessed in the 3rd quarter 2009, it is clearly slowing and we are still expecting the market to rebound in late 2010. A typical early indication of this is the increase in construction activity and the fact that asing lease rates are already rising on many of the more sought after Class B office buildings.

For more information or impartial advice on what Voit’s market data means for your business and how to take full advantage of the “Tenant’s Market” to reduce overhead and realign your real estate with your business plan, contact Stefan Rogers at 949.263.5362.

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