The Orange County office market continues to slide through the first half of 2010.  Vacancy rates rose 2% over last quarter and 7% from a year ago and are at the highest the county has seen in 15 years.  With vacancies rising, landlords have been dropping rates accordingly to retain and attract tenants. Rental rates dropped 2.5% over the 1^st quarter, 11% since the 2^nd quarter of 2009, and a whopping 27% since their peak in 2007.  The county continued to see negative absorption, with over 300,000 square feet of space being vacated in this quarter.  The market’s sublease space has gone down slightly from last quarter, but there still is 1,129,747 square feet available on the market.

So when will the market turn around?

There’s one indicator that impacts commercial real estate more than any other and that is employment.  That is why June’s unemployment report was discouraging.  The county lost 28,400 jobs in June and the unemployment rate increased to 9.5% from 9.3% in May.  Even though we all hear about the quarterly profits companies are recording, these companies are holding off from hiring due to the expected increase in, well…doing business.  Many of the tax cuts that Congress enacted in 2001 and 2003 will expire January 1, 2011.

Meanwhile, starting next year capital gains tax will increase, dividend taxes will rise, and the healthcare bill will increase both by 3.8% in 2013.  Additionally, the new healthcare bill will introduce 20 new or higher taxes – several taking effect January 1, 2011.  And you can bet the state will certainly impose higher taxes, so can you blame the private sector for moving so slowly?

bldg imageUntil companies have more confidence in Washington and Sacramento, the commercial real estate market will remain soft for the foreseeable future.

Unfortunately, that means Orange County witnessed hundreds of thousands of jobs (and companies) disappear.  On the other hand, the county’s largest employers took full advantage of the market conditions.  Verizon Wireless, CalTrans, U.S. Bank, Cisco Systems, Young & Rubicam, KPMG, Oakley, and Corinthian Colleges all signed leases in 2009 accounting for 1,500,000 sf. As we start the new decade, we’ll still see rates continue to fall until we see an increase in job growth.  Moreover, landlords will stay aggressive in attracting new tenants and retaining existing tenants through free rent, turn-key improvements, relocation allowances, and lower parking rates.

So whether you’re lease is coming up in six months or two years there are several strategies you can employ to save your company money.  To learn more about money-saving tips read my previous blogs and look out for a new blog coming next month!

“Renew and extend” – There are two things Landlords absolutely despise – lower rental rates and losing tenants. Depending on the length of your remaining term you can propose an early renewal and extend your current lease another 2-5 years.  This allows you to take advantage of historic low rates, aggressive landlord concessions (e.g. free rent and lower parking charges), and eliminating operating expense pass throughs for another 12 months.

“Share or Sublease” – If your company is downsizing you may want to consider subleasing the remaining space.  I have many clients looking for “plug & play” space and would pay slightly more for the convenience of a fully furnished environment.  Conversely, if your company is on the market for new space I would suggest looking at subleases.  There is over one million square feet in sublease space on the market – some short-term, some long-term, and some even offering free furniture and 1/2 rent.  Either way, subleasing is a great way to save immediately.

“Relocation” – For the first time in 20 years tenants have the upper hand and landlords will do anything to attract new tenants.  Many of our clients have seized the opportunity to move into better quality buildings while lowering rental expenses by up to 20%, often times more.  You should also consider moving to a city that is considered an “Enterprise Zone” for incredible employer tax credits.

“Don’t do it alone” – There are over 90 points in a lease that can be negotiated, so these are just a few creative ways a company can save. The most important decision you make, however, will be the broker that represents your interests.  I recommend hiring a tenant advisor since they exclusively represent tenants and have no conflict-of-interest most other brokers have.  This allows your broker to aggressively go after the items that mean most to your company (relocation allowance, tenant improvement allowance, lower rental rate, free rent, etc.).

Lastly, take the time to interview several brokers.  Any broker can find space, but you want to find the one that will be the most assertive and, of course, knowledgeable of your building, your landlord, and the surrounding marketplace.  It is well worth the time to investigate your options as it could save you millions over the term of your lease…and best of all, the landlord pay the broker’s commission!

Obviously, the county is still facing many challenges before we can declare a turnaround in the commercial real estate sector.  Concerns of primary focus is the increasing vacancy rate (although pace is slowing), tenant delinquency rates rising, and the economic uncertainty that still remains in most consumers and business owners.

However, looking at the 3^rd quarter data indicates that the office leasing market may be at the bottom.  With negative absorption slowing, no new construction coming, unemployment remaining flat over the last two months, and the intensity of available space being placed on the market is decreasing, which all points to the market hitting a trough.  To substantiate that claim, lease transaction activity in orange County was up this quarter over the past nine quarters by almost 60,000 square feet!  Five transactions alone leased over one million square feet in the quarter with two of the county’s largest employers – Verizon and Western Digital – leasing 469,998 and 365,000 square feet respectively.

What that means to the typical small business owner is that lease rates are going to remain soft, but landlords will continue to increase activity in attracting new and retaining existing tenants through free rent, turn-key tenant improvements, relocation allowances, and lower parking rates.  Through personal experiences, I’ve never seen the market so attractive to tenants.  We’ve been busy renewing several clients’ leases that signed five year term at the peak (late 2006) but with two years remaining on their lease.  The result is adding another three years onto your lease, but saving hundreds of thousands of dollars over the term of the lease.  The best part is there is no out-of-pocket costs to you.  So, I’d hate to say it, but “now is the perfect time to review your lease.”