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Just Listed - Creative Office Space Sublease Irvine, California

We're pleased to announce a new creative office space sublease listing in Irvine, CA, available for immediate occupancy

This 2,972 SF creative office space sublease in Irvine is located at Von Karman Creative Campus (VKCC), the premier creative office space campus in the Irvine Airport Area. Key features of this creative office space sublease in Irvine include:

Size: ±500 - 2,972 SF

Rate: $3.50/SF/MTH Full Service Gross

Term: Short Term or through April 30, 2025

Reception, open floor plan, 3 private offices, conference room and kitchenette

Walking distance to food/retail amenities

Easy access to 5, 405 & 55 freeways

Amenity abundant, creative office space campus

Free surface parking

Do not disturb Tenant. Call to show

The property benefits from:

Close proximity to the 405 Freeway and John Wayne Airport

Free surface parking

Complimentary on-site concierge

Indoor/outdoor fitness center, locker rooms, showers, complimentary group fitness classes

New interior conference center, event facility, exterior meeting areas with WiFi

Shuttle service to Metrolink and John Wayne Airport

Vehicle charging stations

Free common-area WiFi

On-site bike lockers and repair station

Outdoor sport court

Outdoor kitchen with BBQ

Exterior event space to host employee or customer events on-site

K-9 friendly campus with two dedicated dog parks

This creative office space sublease Irvine is situated at 16815 Von karman Avenue, Suite 160, Irvine, CA, 92606 and is available now on either a short term basis or a sublease expiring April 30th, 2025. A total of 2,972 square feet of office space is available for sublease, divisible to approximately 500 square feet. For further information on this Irvine creative office space sublease, view our Listing Brochure and call Stefan Rogers at 833.VOITWORKS.

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Are Conflicts of Interest That Important in Commercial Real Estate?

A conflict of interest in a commercial real estate transaction can absolutely mean trouble, which is why dual representation is illegal in commercial real estate in most US states

This is a brief discussion of a rather complex situation, governed by California Civil Code §2079.139d, which we'll discuss further in a future blog. Nonetheless, the majority of commercial real estate brokers generate most of their revenue from landlord representation, so it's important to understand where a conflict of interest can occur if you're venturing into the office space leasing or buying arena.  A dual agent is defined by the aforementioned legislation as “an agent acting, either directly or through an associate licensee, as agent for both the seller and the buyer in a real property transaction.” When a real estate broker signs a listing agreement with a landlord, they have a fiduciary obligation to represent their client’s best interests. Therefore, a listing broker representing both sides of a real estate transaction (or arguably a broker representing a tenant with a requirement that matches some of their own property listings) has a clear conflict of interest.

In reality, it's all about ethics!

Regardless of what legislation or requirement is in place for a broker to represent the best interests of both parties, the real estate negotiation process is not a mediation, so cannot be expected to be fair to both sides in reality. In this situation the broker may not have any incentive to manage the tenant improvement or relocation process for the tenant once the real estate transaction has closed. Furthermore, given the choice, it would be unwise for a listing broker to negotiate in the best interests of a tenant on one of their listings and risk their profitable relationship. It’s also important to note that a conflict of interest can exist practically anywhere and can be open to subjectivity. Even a tenant representation firm that only represents tenants arguably has multiple potential conflicts of interest, for example, competing sublease listings from various clients that could also be competing against each other in the same industry or location. Or simply relationships with certain business clients that are competitors of other clients in the same industry, also represented by the same firm, as is common in the legal industry. What’s most important above all is the level of trust you have with your commercial real estate advisor to disclose any potential conflicts of interest BEFORE you engage them, and of course represent your best interests throughout the real estate process. The best way to do this is to enter into a formal written representation agreement with your advisor, which states the broker's fiduciary obligation to represent your best interests, and to disclose and actual or potential conflict of interest. In reality, it's all about ethics! It shouldn't matter what legislation or agreement is in place to govern dual agency or address any conflict of interest. A great real estate advisor is one that can prove they're an ethical real estate advisor by their actions before and throughout the real estate process.

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When Should I Start My Search For Available Office Space?

The best time to search available office space depends on the size and nature of your office space or commercial real estate requirement

Typically, the best time to search available office space for lease or sale in our opinion is at least 6 months before your lease expiration for requirements under 10,000 SF, and up to 12 months or more for requirements over 10,000 SF. While there's obviously no hard and fast rule, a proactive approach is always wise as the real estate leasing and buying process always takes longer than expected.

"When landlords know your timing is tight they view you as a “captive tenant” and will usually exploit this weakness by demanding their asking terms and being inflexible when negotiating the lease."

The sooner you start the available office space search process, the more time you allow to explore all options and determine your strategy, identify opportunities and alternatives, and negotiate the most favorable lease terms. When landlords know your timing is tight, they view you as a “captive tenant” and will usually exploit this weakness by demanding their asking terms and being inflexible when negotiating the lease. Probably the biggest mistake our clients make is starting the real estate process to late. The sooner you start the process and select and engage a tenant representation advisor to manage the process for you, and commence your available office space search, the more time and money you will ultimately save. Now you have more time to make the right decisions and negotiate the maximum concessions from your real estate transaction. You can search available office space now by clicking HERE for access to all available options, including off-market deals, or call a team member at 833.VOITWORKS.

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5 Proven Ways to Cut Your Office Lease Cost

Reducing your office lease cost can create an immediate and dramatic increase in profitability and an increase in financial efficiency and flexibility

This is particularly relevant in today’s increasingly competitive business for three reasons:

Firstly, with the sharp increase in real estate values recently, many businesses are now burdened with a high office lease cost, and are unaware of the options available for reducing it. Secondly, exponential increases in technological innovation and workplace efficiency continues to create opportunities for businesses to occupy less space versus unnecessarily occupying more space than they need, and paying the price. Thirdly, even the smallest reduction in overhead could impact the success of business, by allocating capital to more worthwhile endeavors. Don't overlook the small stuff!

Many businesses fail to proactively manage their corporate real estate because they underestimate the business risk involved in not doing so, or don’t have the time or expertise.

Outsourcing corporate real estate management to a professional real estate consultant can be very beneficial. Doing so will ensure that office lease costs are kept to a minimum and that the corporate real estate remains efficiently aligned with the business plan. The cost of hiring a real estate broker is minimal and often pays for itself many times over. The process involves an understanding of the business’ real estate requirements and budget, investigating every option for reducing office lease costs, determining the net occupancy cost savings of every option, and professionally executing a process to achieve the required results.

'Voit reduced our office lease cost by 29% and were able to negotiate critical expansion space without interruption to our business operations.'

Metropolitan West Capital Management

There are five ways to reduce your occupancy costs and potentially control these expenses over the long term, including:

Lease Audit and Service Charge Scrutiny.

Disposition of surplus space by sublease.

Early lease renewal to reduce rent/ operating costs to fair market value or below.

Lease renegotiation to reduce total occupancy costs to an affordable amount.

Lease termination/buy-out.

We’ve been able to reduce clients’ office lease costs by over 50% in some instances on service charge scrutiny, new leases, lease renegotiation and renewals, and up to 100% on subleases and assignments.

So, if you haven’t professionally and thoroughly reviewed your corporate real estate and occupancy costs, we’ll gladly provide a complimentary no-obligation consultation and occupancy cost audit to determine any options to quickly reduce your overhead.

ARRANGE A CONSULTATION...

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The Creative Office Space Evolution

What is Creative Office Space?

Creative office space evolved as a progressive alternative to traditional office space, aimed at enhancing corporate culture and identity, and improving employee recruitment, productivity, retention and well-being.

However, its physical definition (typically an open plan with concrete floors, open ceilings, unfinished walls) belies its true meaning and potential. Moreover, creative office space is often counterproductive if not precisely delivered to meet businesses’ and employees’ needs. Numerous workplace studies show that the physical attributes of an office space have a huge positive or negative impact on not just creativity, but productivity, performance, well-being, and recruitment, and most businesses still blindly overlook this. As workspaces, and how businesses utilize them, evolve, so does the scientific understanding of how work environments impact human performance. Thus, the true definition of “creative office” is now being realized as businesses understand the benefits of investing in office space for the benefit of their workforce, and ultimately the success of their business. A successful creative office space transcends its obvious physical attributes, focusing on form before function. The office space should be an organic, dynamic product, formed from the collective and individual needs of the people and technologies it accommodates, not based solely on a superficial vision of what we think it should look like. The visual attributes of a space are important in terms of how they are viewed by the employee, and customer. But first, it’s essential to consider critical factors, including temperature, natural light and views, colors, noise control, ergonomics, choice, employee engagement, human behavioral traits, communication, workflow and schedules, and well-being.

A recent study by Warwick University found happy employees are 12% more productive, and unhappy employees are 10% less productive. That’s a 22% variance in performance!

The statistics are endless and continually reinforced by numerous clients of mine. A creative marketing agency in Irvine, California developed a highly functional creative office space in a historic building, which improved company culture, productivity and morale, and recruitment; proof again that office space is evolving from and inconvenient cost of doing business, to an asset that, if tailored thoughtfully to the needs of people, can deliver a significant competitive advantage. The more an office space is customized towards its ultimate purpose, the more successful and efficient the business it accommodates will be. It’s ultimately about the people. And creative office space in the original and real sense of the word, is what the workforce of the future wants.

For advice on creative office space solutions and Workplace Strategy for your business, contact Stefan at 949-263-5362 or via email at [email protected].

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Voit’s Q4 2019 OC Office Market Report & 2020 Forecast – Just Released!

New Decade. Same Cycle.

2019 was another good year for the OC office market. A diversified, well-educated employment base continues to keep the office market on firm footing. Consistent demand has kept lease rates and sale prices on an upward trend notwithstanding the significant spike in speculative office development over the past two years. This year technology tenants are expected to dominate leasing, which isn’t surprising because they accounted for 22% of the activity through the first half of 2019. Interest in flexible office space will continue to grow, but at a much slower pace thanks to the recently botched WeWork IPO. Political activity continues to impact the overall CRE outlook. The House has passed the USMCA (NAFTA 2.0) and it is expected to be signed into law in January. Many believe the new law will strengthen U.S. trade with Canada and Mexico. Tax incentives for energy-efficient commercial buildings have been extended, allowing owners to claim a deduction of up to $1.80 /SF for qualifying systems. Of great concern going forward is the California Schools and Local Communities Funding Act, which will likely be on the ballot in November. This controversial initiative would remove Prop 13 protection for most commercial properties. Beginning with the 2021–22 tax year, commercial property would be subject to periodic reassessment to full market value even if it does not change hands. Tenants subject to operating expense pass-through could be forced to absorb huge tax increases, while investors who cannot pass those increases along would see a decline in property values due to lower NOI. Looking ahead, I’m keeping an eye on these key market drivers: #1: Interest rates will remain low. The Fed’s three rate cuts in 2019 made clear its intentions to avoid recession. We expect interest rates to remain stable going forward, which makes 2020 a good year to acquire or refinance office properties. #2: The creative and progressive design trends that have dominated the OC office market since 2015 will continue. The latest iteration is the “outdoor” office and developers have taken note. Employees, predominantly millennials and Gen Z, expect an excellent experience at work, which means spaces with high levels of choice, variety and balance. #3: The alternative investment sector of CRE will remain strong. Data center, self-storage and medical office activity has doubled since 2008, making up approximately 12% of all CRE activity. As this trend continues, expect to see adaptive reuse projects growing in popularity. Old factories, mills, schools, vacant retail boxes and more are being converted into flex space and residential housing. Programs like Opportunity Zones or the Low-Income Housing Tax Credit will further support those efforts. Barring a catastrophic economic disturbance, 2020 should be another solid year for Orange County’s economy and commercial real estate market.

OC Office Market Overview

The OC office market has stabilized into a relatively strong and stable position. Vacancy remains manageable, but has ticked up slightly in the past year. Technology, Financial Services, and Health Services firms have driven a  significant amount of recent leasing activity. However, expanding companies are leveraging new workplace technologies to save money by increasing the number of employees for each square foot of space they lease, and that has had an impact on overall absorption and transaction velocity. Tenants in Class A and B buildings who leased space early in the recovery cycle are getting sticker shock at renewal time, as rent growth, which has moderated in recent quarters, is up substantially over the past 5 years. To mitigate higher per square foot occupancy costs, many tenants are moving down in building class and taking less space by switching to more open workspace designs. The market has seen modest levels of supply additions in recent years compared with previous development cycles, but several of the Class A projects delivered over the past two years are leasing up more slowly than expected. Net absorption, though still in positive territory, has been softening over the past several years. Capital market conditions remain solid, and while sales volume is down from its record level back in 2016 and 2017, it remains robust. Cap rates remain at or near historical lows, especially for high quality Class A and B assets. Vacancy Rates Nearly 1.39M SF of space has been delivered in the OC office market since Q1 2019, expanding the office base by 1.2%. This has contributed to the uptick in overall vacancy. Direct / sublease space (unoccupied) finished the quarter at 11.44%, up 48 basis point year-over-year. North Orange County posted the lowest vacancy rate at 7.17%, while the Airport Area and Central County had vacancy rates greater than 12% at the end of fourth quarter. Higher vacancy in the Airport Area is mainly due to its concentration of new deliveries still in the initial lease-up phase. Lease Rates Rent growth in the OC office market leveled off in 2019. The average asking lease rate in Orange County rose by just 0.37% over the past year compared with 1.7% nationwide. The average asking FSG monthly asking lease rate lost $0.09 in the fourth quarter, ending the period at $2.74. The average quoted rental rate for Class A space was $3.10 per square foot, compared with the Class B asking rate of $2.47 per square foot. Transaction Activity Slow growth in the region’s labor force has resulted in hiring challenges for many firms, and that may be impacting transaction velocity. Orange County’s labor market remains historically tight, with the unemployment rate holding at 2.5%. The total square feet leased and sold in the fourth quarter was approximately 3.4M SF, a significant slowdown from the 5.0M SF of transactions in the fourth quarter of 2018. Downsizing into more open workspace to increase headcount and appeal to younger workers is also a factor. Employment The unemployment rate in the OC office market was 2.5% in November 2019, unchanged from a revised 2.5% in October, and below the year-ago estimate of 2.7%. This compares with an unadjusted unemployment rate of 3.7% for California and 3.3% for the nation during the same period. Local job growth was evident across all subsectors but financial services (up 1,200 jobs) and Government (up 2,200 jobs) led the way as the year ended. Construction Total space under construction in the OC office market ended the year at 795,177 square feet. In Costa Mesa, construction is underway at The Press located at 1375 Sunflower Drive. This former L.A. Times printing facility is being converted into more than 300,000 square feet of creative office space to accommodate the shift in demand from businesses looking to recruit and retain a younger workforce. The Source, located in the Irvine Spectrum, offers a two-building concept with common atrium connectivity and more than 70,000 total square feet of rentable space. Irvine Company’s build-to-suit for Alteryx Inc. at Spectrum Terrace 2 is also in the works. The company will occupy the bulk of the project’s 340,000 square foot second phase. The first phase is fully leased. Absorption Co-working tenants like WeWork have leased millions of square over the past few years and the current slowdown in that sector is partly responsible for the recent decline in new transaction velocity. Orange County office occupancy grew by 167,588 square feet in the final quarter, bringing the year-to-date gain in occupied space up to 707,160 square feet. The Airport Area submarket accounted for 260,089 square feet of that total. By product type, Class A office led the way with a net gain of 314,790 square feet in just the fourth quarter. Notable transactions included: Avanir Pharmaceuticals (103,879  square feet in Aliso Viejo), County of Orange Assessor (69,151 square feet in Orange), and WeWork (71,076 square feet in Irvine). FORECAST: Lease Rates Rent growth may pick up again as the absorption of the remaining first generation space gets leased up. With fewer attractive alternatives in the market, rent growth should return to an annualized rate of 2–3% over the course of the year. Vacancy Rates We anticipate that the overall vacancy rate will remain in the 11–12% range over the next three quarters, but the Class A sector will run somewhat higher due to its higher concentration of first generation space. Overall Signs of a global economic slowdown, concerns over US-China trade relations and a decline in the US GDP growth rate motivated the Fed to cut its benchmark Federal Funds Rate 3 times in 2019. That effort to stimulate consumer spending and business investment seems to be working. Equity markets responded by rising to new highs and the spread between short- and long-term US Treasuries widened again after a dangerous inversion earlier in the year. The latest estimates for domestic GDP growth for 2020 are running in the low 2% range, which should be enough to keep the current economic recovery on track. For more information on the OC office space market and how to capitalize on real estate opportunities to grow your business, contact Stefan Rogers 949.263.5362 / [email protected]. Click HERE to download Voit’s Q4 2019 OC Office Space Market Report.

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Irvine Spectrum Creative Office Space for Orchid Brands

Orchid Brands relocated to a new Irvine Spectrum creative office space after they outgrew their current building and sought a higher image headquarters

Orchid Brands engaged VoitWorks to provide Tenant Representation services and consult on its urgent need for a new Creative Office Space HQ in Irvine Spectrum. The business outgrew its current office space in Irvine, California and the principals wanted to revitalize their office space as they positioned the company for further growth. We quickly identified a new building with 5,000 SF of creative office space in Irvine Spectrum, which was perfect for their current and future expansion needs. A new lease was negotiated in 5 days, with the right to sublease excess space short term until the business grows into the new building. A below fair market value rent was negotiated together with concessions, and including free Herman Miller furniture for a quick and low cost set up in the new office space.

"Stefan was able to get our rapidly growing public company into a new creative building in Irvine, that was turn-key, and move in ready. We gave him a timeline of a move in 10 days, which we knew would be impossible, and he pulled it off once again. Our company couldn’t be happier and the building was an immediate boost in company culture and overall work environment. I’ve been working with Stefan for over 7 years now, and I couldn’t be happier with his services and professionalism."

Orchid Essentials

Orchid secured the perfect new Irvine Spectrum creative office space headquarters in only 10 days. The building comfortably accommodates the current business needs, with room for expansion. The short-term sublease of excess space can be terminated when Orchid is ready to grow into the entire building, so the office space is perfectly right-sized to the business and overhead is minimized. The new creative office environment will have a material impact on the ability to recruit and retain top talent. For more images and information, check out Orchid’s new Irvine Spectrum creative office space. For information on Irvine Spectrum creative office space, and how to capitalize on real estate opportunities to grow your business and cut your overhead, contact Stefan Rogers 949.263.5362 / [email protected].

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Irvine Spectrum Creative Office Space Sublease Listing

We’re pleased to announce a new Irvine Spectrum creative office space sublease listing, available for immediate occupancy

This Irvine Spectrum creative office space sublease is located at 9930 Irvine Center Drive, Irvine, California. Creative office space suites ranging between 2,475 SF and 4,960 SF are available at an asking rent of $2.00/SF/Mth Triple Net (net of utilities and building operating expenses). This office space sublease is available through July 31st, 2024, and benefits from:

High-end “as-new”  tenant improvements

Double door building entrance

180 degree window line

Efficient floor plan includes several private offices, open areas, a fish bowl conference room, large break area and lounge, reception, and storage

On-site amenities include: ample free surface parking, building-top signage, walking distance to food/retail amenities

Convenient freeway access

Close proximity to Irvine Spectrum Center and Los Olivos Shopping Center

Herman Miller furniture available

This Irvine Spectrum creative office property is situated on the corner Irvine Center Drive and Lake Forest and has exposed ceilings, plentiful sunlight, and creative office space floor plans on both floors. The property features 5 private offices, 2 conference rooms, and kitchenette on each floor. Building signage with high visibility off Lake Forest. Located in Orange County’s business hub, 9930 Irvine Center Drive is part of the Bacchus Signature Series, a 22-acre master planned commercial office development of beautifully landscaped grounds along the San Diego Creek in the Irvine Spectrum between Irvine Center Drive and Bake Parkway.This premier Irvine Spectrum location offers immediate access to the 405, 5, and 133 Freeways. Irvine Spectrum Center and John Wayne Airport are a short distance away. This Irvine Spectrum creative office space property also benefits from recent street upgrades that connect Bake Parkway, Lake Forest Drive and the 133 Freeway. For further information on this Irvine Spectrum creative office space sublease, view our Listing Brochure and call Stefan Rogers at 833.VOITWORKS.

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Voit’s Q3 2019 Orange County Office Space Market Report & Forecast – Just Released!

Top of the Market?

Orange County’s office market has improved steadily since the prior downturn but is now showing signs of slowing in both demand and supply. This is expected, given the current “slow and steady” economic conditions, consolidation of office tenants due to technology, workplace and lifestyle changes and the fact that the economy is effectively at full employment. Absorption has once again turned negative as the market itself consolidates — in large part due to the typical office user no longer needing as big of a footprint — rental growth slows, and vacancy rates show signs of a potential increase. Sale transaction activity has slowed significantly due to a lack of supply, minimal foreign investment and record high pricing — a sure sign of the top of the sales market. But how long will we stay on top? As long as we see positive job growth and vacancy rates stay relatively flat, we can continue to expect sustained levels of lease absorption and rental growth into the foreseeable future, although sales prices and transaction activity will remain muted. However, the longer the economy continues to grow, the more susceptible or fragile it is to be impacted by economic events, or a downgrade in business or consumer sentiment. The trends we’re currently witnessing have historically preceded a downturn, and we’re losing velocity. We are starting to see increases in tenant concessions as landlords continue to shore up their rent rolls at record high rents and fill outstanding vacancies in preparation for “top of the market” sales or favorable debt refinancing. Class A office is currently proving to be the most competitive in terms of current lease concessions due to the high vacancy rates and levels of obsolescence (inconvenience) compared with low-rise office. Office headcounts per square foot have increased dramatically in recent years, particularly in the tech sector, attenuating the increase in demand driven by job growth and new business startups. This presents its own unique set of challenges for landlords (accommodating the increase in parking is just one example) as they adapt to this and many other technology and lifestyle-driven changes. Coworking has greatly impacted current workplace strategy, disrupting office space design and setting new standards for amenities and flexible workspaces. As such, top tier spaces continue to lease at premiums, and Class B or C properties with little to no amenities are struggling to compete, even at discounted rents. Many landlords continue to develop where feasible, battling increasing construction costs and planning hurdles, competition for viable opportunities, and a lack of development options. Adaptive reuse is back in a big, and a good way. “Slow and steady” continues, and with little sign of any growth triggers in the Orange County office market and beyond, it’s just a matter of time before things trend materially downward. While there’s the possibility of a moderate cooling in the run up to next year’s election, due to uncertainty on economic policy among other things, it’s difficult to predict what’s in store for the Orange County office market. We expect to have at least another 12 months of continued, if somewhat muted, growth.

Orange County Office Market Overview

The job market is continuing its positive trend and companies are leasing office space; however, it’s not been enough to keep the vacancy rate from ticking up. While Orange County leasing activity racked up roughly 2.8 million square feet, office vacancy during the third quarter inched up to 11.22%. Typically, this data would indicate signs of an anticipated correction or softening in the office market. However, strong economic and demographic fundamentals suggest the contrary. While some uncertainty exists, we expect the impact to be minimal in Orange County given the diversity of the local economy. Office properties around John Wayne Airport continue to post some of the highest rents in Orange County, with further gradual increases in rents expected alongside decreases in vacancies. Vacancy Rates The office vacancy rate in Orange County increased in the third quarter, inching up 18 basis points. While the increase is minor, it shows the effect of new office product coming online. Direct / sublease space (unoccupied) finished the quarter at 11.22%, down 0.97% from the rate of a year ago. North Orange County posted the lowest vacancy rate of any major submarket at 8.37%, while the Airport Area and Central County had vacancy rates greater than 14% at the end of third quarter. Lease Rates The average asking FSG lease rate per month per square foot in the Orange County office market was $2.83 at the end of the third quarter, a 4.04% increase from this time last year and 0.71% increase from the second quarter. The average quoted rental rate for Class A space was $3.20 per square foot. Class B rental rates came in at $2.43 per square foot. The overall Orange County office market average asking rate is now at an all-time high, surpassing the previous peak of $2.77 in 2007. Transaction Activity Landlords are being challenged by a new breed of office providers who are meeting the growing demand for flexible, collaborative, accessible, short-term office leases — the so-called “coworking” spaces. Not only has coworking altered the way people use and lease office space, it’s also revolutionized the office market. Over the last three quarters, coworking companies have leased more than 500,000 square feet of office space in Orange County. In the third quarter of 2019, 2.9 MSF in total transactions (sale and lease) were recorded, down from 3.8 MSF the previous quarter. Economy The unemployment rate in the Orange County market was 3.0% in August 2019, down from a revised 3.2% in July 2019, and below the year-ago estimate of 3.1%. This compares with an unadjusted unemployment rate of 4.2% for California and 3.8% for the nation during the same period. The growth was evident across all subsectors with three sectors reporting month-over gains: financial activities (up 500 jobs), construction (up 400 jobs) and professional and business services (up 100 jobs each). Construction Total space under construction came in at 450,824 square feet for the third quarter. In Costa Mesa, construction is underway at The Press located at 1375 Sunflower Drive. This former L.A. Times printing facility has a planned conversion into more than 300,000 square feet of creative office space. The Source, located in the Irvine Spectrum, offers a two-building concept with common atrium connectivity and over 70,000 total square feet. Absorption After coming off a positive net absorption of 349,140 square feet in the second quarter, the third quarter ended with negative net absorption of 104,063 square feet. West Orange County had the most substantial positive absorption in the county, recording 61,756 square feet, with tenants such as Multiquip Inc. and Kushco Holdings, Inc. expanding their footprints. Class A office contributed the highest negative net absorption, with a negative 54,482 square feet absorbed in the third quarter: Viant vacated 46,508 square feet in 4 Park Plaza in Irvine, MP Biomedicals vacated 20,860 square feet in 3 Hutton Centre Drive in Santa Ana, and Kinder Morgan vacated 1100 W. Town & Country Road in Orange. FORECAST: Lease Rates Despite slightly elevated vacancies due to new supply, rent growth continues its upward trend. Expect lease rates to continue to climb 2–3% annualized growth in the coming year. Vacancy Rates Demand is solid, lease rates have increased, and unemployment is down. This foundation of strong economic fundamentals has contributed to the long-term strength of the Orange County economy. We expect more of the same through the balance of 2019, with anticipated vacancy rates in the 10–12% range over the next three quarters. Overall The job market is healthy, but it’s not enough to keep the vacancy rate from ticking up. While Orange County racked up roughly 1.5 MSF of leasing activity, office vacancy during the third quarter inched up to 11.22%. Typically, this data would indicate signs of a projected correction or softening in the office market; however, strong economic and demographic fundamentals suggest the contrary. While some doubt exists, we expect the impact to be minimal in Orange County given the diversity of the local economy. For more information on the Orange County office space market and how to capitalize on real estate opportunities to grow your business, contact Stefan Rogers 949.263.5362 / [email protected]. Click HERE to download Voit’s Q4 2019 Orange County Office Space Market Report.

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10 Common Office Space Leasing Mistakes

Office space leasing can be a risky, time-consuming and complicated process

Here's some of the most common office space leasing mistakes that tenants make:

Time Constrained - In any negotiation, time is the most valuable commodity. The most common mistake tenants make is underestimating the time it takes to properly conduct a property search, perform needed due diligence, negotiate business terms, draft and negotiate lease documentation and construct new office space. Generally, tenants should allot 6 to 12 months for office space leasing; however, the bigger the requirement, the more time that should be allotted. For tenants exploring a lease renewal, they must keep in mind their notice of renewal deadlines and adjust their due diligence period accordingly. Finally, tenants should also apply the same time frame to evaluating any early termination or contraction options they have, which may allow the tenant to renegotiate their lease to more favorable market terms. Not assembling the right team - Office space leasing requires specialized expertise and a high level of market knowledge, which many tenants do not possess, but which landlords and their brokers do, given it's their core business. To level the playing field, tenants are well advised to assemble a team compromised of at least a qualified tenant representation advisor, and even a project manager, and architectural team for larger projects. The tenant representation advisor can serve as “quarterback” for each of these team members and provide the tenant with a single point of contact. Lack of Internal Consensus and Focus - As a real estate decision affects multiple stakeholders in an organization, its important to develop consensus on the objectives and key drivers among the company’s stakeholders. An internal single-point of contact should be appointed to maintain a clear line of communication with the team, and develop a real estate strategy aligned with all stakeholders. Not defining space needs - Given changes in technology, many companies today are able to effectively use a lot less space than a few years ago. Before embarking on a search for space, tenants should work with an architect or tenant representation advisor to develop a space program which will forecast current and future office space leasing needs. Lack of flexibility - Given the rapid change in business today and long-term nature of most office leases, tenants need flexibility to align their office space to their business needs. Early in negotiations, tenants should look to maximize flexibility with rights to contract, expand, terminate, extend and sublease excess space as needed. While such rights are an uphill climb with most landlords (and their lenders), savvy tenants gain the most by pre-negotiating these flexibility rights while competing landlords are trying to land the deal. Not independently verifying building condition and infrastructure. This is particularly important when tenants are exploring older office buildings where the mechanical infrastructure might be inadequate for certain tenants. Proper due diligence helps avoid future surprises. Not considering all occupancy costs - A tenant’s occupancy costs go beyond the base rent. A major component of office space leasing is the treatment of “Operating Expenses” and “Taxes”. If not carefully negotiated, landlords may have a lot of latitude on what they charge a tenant as an “Operating Expense” or “Taxes”. There may be unexpected costs buried in the definitions which can play havoc with the tenant’s budget. A well advised tenant will have a laundry list of exclusions to what is an “Operating Expense” and “Taxes” and will also have an annual cap on increases in such charges. They should also have the right to audit such charges. Lack of Competition - Tenants must engage multiple landlords to compete for the tenant’s business. This is particularly crucial when a tenant is exploring renewal versus relocation. Only by creating competition for it's tenancy, will a tenant obtain the most favorable lease terms. Inadequate attention to Tenant Improvement Process and Lease Language - Many tenants underestimate the complexity and cost of an office build-out. Its not uncommon for the interior construction to exceed $50 per square foot for an average office space build-out. Higher-end construction can approach and exceed $80-$100 per square foot. With this much money at stake and the operational importance to the tenant’s business, tenants must carefully perform their office space leasing due diligence of space planning and construction pricing to avoid any surprises. Of equal importance, tenants must negotiate the lease construction language (i.e., “Work Letter”) to clearly allocate responsibility between tenant and landlord and make clear the landlord’s obligations. In particular, hidden fees and costs should be negotiated and responsibility for delays and costs overruns clearly allocated. If you need help with the office space leasing process, or if you just need some advice or have questions, we can help. Check out our no-cost Tenant Representation services for further information.

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Voit’s Q2 2019 Orange Office Space Market Report & 2019 Forecast – Just Released!

The Orange County Office Market Continues Expansion

Let’s face it, even the most objective of us is slightly biased. This makes us human, after all. With regard to the Orange County office market, information can be interpreted differently depending on these personal biases. For instance, there is plenty to support the argument for continued growth, and there is evidence that a slowdown is around the corner.

Our industry has coined certain catchphrases to signify different cycles for the market. Terms such as “headwinds”, “slowing increases” and “lower growth” can be found in articles that will fuel a bias or belief that a market slowdown is looming. At the same time, you can find articles that report “steady expansion”, “Bulls outnumber Bears” or “more jobs than workers” which would support that the market is sturdy and still growing. The facts are: capital costs remain low, purchase prices continue to rise, speculative development remains steady, and rents are being raised.

However, the office market, like most things in life, can allow varied interpretations of the facts. By my own observation, I would suggest that the market is accelerating but at a slower rate, thus maintaining steady growth. While it may not be the fast-paced market we’ve been experiencing for the past few years, this state of the market presents other, different opportunities.

For office property owners, now might be a good time to take advantage of the healthy market by performing a sale / leaseback. In turn, it’s a great time for an owner-user to take advantage of the very affordable SBA programs that are currently available. Or, if you are a tenant, there are numerous opportunities to upgrade to one of the many creative office space environments with flexible workspaces and abundant amenities.

Whatever side of the fence you’re on, whether you think we’re headed for a downturn or expect the market trajectory to continue, there is no denying that the Orange County office market will continue to march onward and upward for at least the balance of 2019. We will see higher rents and sales prices; however, if the slowing continues, this will cause a shift from a seller’s market towards a buyer’s market. Sellers will not get away with overpricing, just as buyers will be unable to make low ball offers. Sellers will need to exercise patience as the end of the year approaches.

Orange County Office Market Overview

Companies are drawn to Orange County because of its highly educated employment base, which is a contributing factor for the strong office demand. Consistent demand has resulted in vacancies being reduced 30% since 2010. We are currently in the longest economic expansion in United States history, with a solid economy and job growth on the rise, as well as business expansion.

Most Orange County businesses and economists remain optimistic that the expansion will continue into next year.

With the second quarter vacancy rate registering at 11.49%, we should see upward pressure on pricing in Orange County for both lease and sale properties over the next few quarters. This is evidenced by the new all-time high of $2.81 per square foot average asking full-service gross (FSG) rent for Orange County office space.

Vacancy Rates

Office absorption in Orange County strengthened steadily as the labor market expanded. Annual net absorption for the year thus far has been positive in Orange County. Direct / sublease space (unoccupied) finished the quarter at 11.49%, 6 basis points lower than the second quarter of 2018. West County posted the lowest vacancy rate of any major submarket at 6.90%, while the Airport Area and Central County had vacancy rates greater than 12% at the end of this last quarter.

Lease Rates

The average asking FSG lease rate per month per square foot in the Orange County office market was $2.81 at the end of the second quarter, a 5.24% increase from this time last year and a six-cent increase from the first quarter. The average quoted rental rate for Class A space was $3.19 per square foot. Class B rental rates came in at $2.39 per square foot. The overall Orange County office market average asking rate is now at an all-time high, surpassing the previous peak of $2.77 from 2007.

Transaction Activity

In the second quarter of 2019, 3.48 million square feet in total transactions (sale and lease) were recorded, up from 3.30 million square feet the previous quarter. Positive indicators include the low vacancy rate, which has driven a fair amount of new construction, and the abundant supply of quality office space which is expected to accommodate demand.

Economy

The unemployment rate in Orange County was 2.4% in May of 2019, down from a revised 2.6% in April 2019, and below the year-ago estimate of 2.5%. Between May 2018 and May 2019, professional and business services posted the largest year-over-year expansion with a gain of 7,800 jobs. The growth was evident across all subsectors with more than half of the job expansion in administrative and support and waste services (up 4,100 jobs), followed by professional scientific and technical services (up 3,200 jobs), and management of companies and enterprises (up 500 jobs).

Construction

Total space under construction came in at 422,490 square feet for the second quarter. The only project is Spectrum Terrace phase 1, a 422,490 square foot project consisting of three four-story office buildings, part of a 1.1 million square foot ultra-modern office campus nestled on 73 acres of open space in the heart of SoCal’s innovation hub.

Absorption

The Orange County office market posted 395,053 square feet of positive net absorption during the second quarter, giving the market its third consecutive quarter of positive net absorption. Strong market fundamentals and leasing momentum carried from the end of last year into the second quarter. Class B office contributed the highest positive net absorption, with 390,377 square feet absorbed in the second quarter. Class A had a positive net absorption of 11,589 square feet, and Class C finished the second quarter with 6,913 square feet of negative net absorption.

FORECAST:

Lease Rates

Despite slightly elevated vacancies due to new supply, rent growth continues its upward trend. Expect lease rates to continue to climb 2–3% annualized growth in the coming year.

Vacancy Rates

Demand is solid, lease rates have increased, and unemployment is down. This foundation of strong economic fundamentals has contributed to the strengthening of the Orange County economy. We expect more of the same through the balance of 2019, with anticipated vacancy rates in the 10–12% range over the next three quarters.

Overall

Economic growth throughout Orange County is one of the main drivers of the continued low vacancy rates and rent growth. Furthermore, some of this region’s leading businesses are growing at an even faster rate than the economy. High levels of leasing and increasing lease rates have made investment sales more attractive. We are continuing to see a decrease in the amount of available space on the market and increases in occupancy costs. Positive absorption should continue through 2019, and with few new deliveries in the pipeline to alleviate the pressure on vacancy, the market should continue to tighten.

For more information on the Orange County office space market and how to capitalize on real estate opportunities to grow your business, contact Stefan Rogers 949.263.5362 / [email protected].

Click HERE to download Voit’s Q4 2018 Orange County Office Space Market Report.

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Talonvest Upscales to New Creative Office Space in Irvine

VoitWorks secured a new California HQ for Plex and has since represented them on several expansion options including a recent office space lease renewal in Irvine, California

Talonvest relocated to a new creative office space in Irvine, California, after they outgrew their current building and sought a higher image headquarters

Talonvest re-engaged VoitWorks to provide Tenant Representation services and consult on its office space needs nine months before their lease was expiring. The business outgrew its current office space in Irvine, California and the principals wanted to revitalize their office space as they positioned the company for further growth.

We conducted a complete strategic analysis of Talonvest’s real estate needs and budget. We then conducted a search for creative office space in Irvine that permitted long-term growth and flexibility, while positively reflecting the client’s brand. We then leveraged their relationships with multiple landlords, and negotiated aggressively to create maximum negotiating leverage on their preferred office space option. We also concurrently negotiated a lease renewal of their current office space as a back stop.

“VoitWorks did an awesome job representing Talonvest in our relocation. From helping us understand the options in the market to negotiating the lease and staying active through the process of our move, they are always providing value! That’s why we are a repeat client.”

Talonvest landed at The Launch, a recently renovated Irvine Company office building next to the airport. The new creative office space in Irvine provides a very progressive office space design and layout. The suite offers floor to ceiling glass, 180 degree views, functional creative office features, and options for relocation as the business expands. We also provided oversight on the project management of the tenant improvements. And due to an unforeseen construction delay, we were able to secure additional concessions even after the lease was executed.

Check out Talonvest's new creative office space in Irvine!

For information on an office space for lease in Irvine, and how to capitalize on real estate opportunities to grow your business and cut your overhead, contact Stefan Rogers 949.263.5362 / [email protected].

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Voit’s Q1 2019 Orange County Office Space Market Report & 2019 Forecast – Just Released!

There’s Really Nothing Much to Worry About

The Orange County Office Market still offers opportunities on all sides...

Capital costs remain low, fueling steady institutional demand for office buildings, even amid record high pricing and fewer value-add opportunities. Speculative development remains steady, with numerous adaptive reuse projects like The Press in Costa Mesa.

Landlords continue driving up rents wherever possible; however, tenant retention remains steady due to onsite enhancement of amenities / services and flexible workspaces.

Tenants can still strike great deals with an intelligent and creative approach to leasing. And lease expirations offer the perfect opportunity for businesses to realign their workspace with their rapidly changing needs and embrace current office space trends focused on people–recruitment, retention, and productivity.

Owner/occupiers are well situated to execute sale/leasebacks as a convenient and nontraditional way of raising capital or “cashing out” at a profit. And tenants may still able to buy a building, if they can find one, with very affordable SBA programs and relatively low pricing when compared to current leasing rates.

Rental growth slowed marginally in the first quarter, trending with the nominal increase in vacancy, although it is too early to tell if this indicates a permanent shift. The average asking full service gross office rent was $2.79 per square foot per month in the first quarter of 2019, a nominal increase over the fourth quarter of 2018, furthering the slow and steady rental growth we’ve been enjoying. While this would indicate we’re perhaps reaching the top of the bell curve, the continuing tight supply, coupled with steady tenant demand from small businesses and co-working, and historically cheap debt, is likely to sustain further growth through 2019.

It would be reasonable to expect a muted recession/office market slowdown within a couple of years, with all the political turmoil and some recently shaky economic indicators, including the recently inverted yield curve, the “hands-off” Fed, and our simmering trade war with China. However, short-term economic fundamentals remain strong in most areas, and most commercial real estate players remain bullish about the sector.

The economy is strong. The office market is strong (for now). While no one knows for sure, it could certainly continue. There’s nothing wrong with “slow and steady!”

ORANGE COUNTY OFFICE MARKET OVERVIEW:

The Orange County office market rally is extending into 2019. Rent growth has slowed but remains positive, and occupancy levels are elevated. Institutional investors continue to target Orange County, regularly trading trophy properties and office campuses. Landlords have reason to be optimistic, with strong tenant demand across the market and creative space in renovated and newly constructed properties providing leasing flexibility. While vacancy remains below the highs observed in Orange County in the past 4 years, it has slowly been on the rise. With little speculative construction in the pipeline, availability rates remain on a downward trend. All of this suggests that the market will remain tight, with rents continuing to rise into 2019–20 if the U.S. economy can keep out of recession.

Vacancy Rates

Occupancy is being driven by changing consumer preferences. Tenants have reduced their physical footprint despite having a greater number of employees. Net absorption has picked up after a sluggish start to the year, helping to mitigate supply pressures. Vacancy in the Orange County office market was 11.34% at the end of the first quarter of 2019, up 5 basis points from the prior quarter, and up 2.62% compared with the previous year. Expect vacancy to trend downward throughout 2019, based on steady job growth and consumer confidence, coupled with many tenants in the market currently shopping for space.

Lease Rates

With vacancies holding near the 10-year average of 12% so far during 2019, rent gains have grown modestly in recent months. The average asking full-service gross (FSG) lease rate per month per square foot in the Orange County office market was $2.75 at the end of the first quarter, a 3.77% increase from this time last year and a $0.02 increase from the fourth quarter of 2018. Should the national economy fall into recession, office rents will likely fall less than other major markets.

Transaction Activity

In the first quarter of 2019, 2.22 million square feet in total transactions (sale and lease) were recorded, down from 5.40 million square feet the previous quarter. The rising cost of leasing office space has led tenants to consider co-working spaces, particularly for satellite locations. With this trend continuing to grow, in more and more cases, communal offices are competing with traditional commercial office space for the same tenants. So far in 2019, five co-working firms have leased a combined 267,521 square feet.

Economy

The unemployment rate in Orange County was 2.8% in November of 2018, down from a revised 2.9% in October 2018, and below the year-ago estimate of 3.1%. This compares with an unadjusted unemployment rate of 3.9% for California and 3.5% for the nation during the same period. The professional and business services sectors propel the economy. Orange County is also the third-most diverse high-tech sector in the nation, behind only San Jose and San Diego. Almost 200 Fortune 500 companies have space in one of the Irvine submarkets, and innovation firms including Blizzard Entertainment, Broadcom, Edwards Lifesciences, and Google have a significant footprint in Orange County.

The unemployment rate in Orange County was 3.0% in February of 2019, down from a revised 3.3% in January of 2019, and below the year-ago estimate of 3.1%. This compares with an unadjusted unemployment rate of 4.4% for California and 4.1% for the nation during the same period. Between January and February of 2019, total nonfarm employment increased from 1,642,700 to 1,650,300, an increase of 7,600 jobs. Professional and business services added 3,500 jobs, with 74% of the growth in administrative and support services (up 2,600 jobs), which included temporary help firms.

Construction

The construction pipeline remains slow and steady, continuing the trend of minimal development. Since the first quarter of 2018, supply additions have averaged around 240,000 square feet per quarter. Total space under construction checked in at 1,377,860 square feet at the end of the first quarter with the most notable from Lincoln Property’s Flight @ Tustin Legacy, a spec project that is expected to start delivering any day now. In Irvine, creative office conversions will compete directly with ground-up development. In Costa Mesa, work is underway on The Press, a planned conversion of the former Los Angeles Times printing plant into more than 300,000 square feet of creative office space. In Irvine, Spectrum Terrace, a 1.1 million square foot ultra-modern office campus nestled on 73 acres of open space in the heart of SoCal’s innovation hub is slated to deliver phase 1 mid-year.

Absorption

Absorption gains are being created by co-working operators, and by tenants moving in Orange County, with net absorption at 339,045 square feet, which totals approximately 11 million square feet of positive net absorption since 2010. Strong market fundamentals and leasing momentum carried from the end of last year into the first quarter. Class B office contributed the highest positive net absorption, with 203,512 square feet absorbed in the first quarter. Class A had a positive net absorption of 141,925 square feet, and Class C finished the first quarter with 6,392 square feet of negative net absorption.

FORECAST:

Lease Rates

Despite slightly elevated vacancies due to new supply, rent growth continues its upward trend. Expect lease rates to continue to climb 3 – 4% annualized growth in the coming year.

Vacancy

Demand is solid, lease rates have increased, and unemployment is down. This foundation of strong economic fundamentals has contributed to the strengthening of the Orange County economy. We expect more of the same in 2019, with anticipated vacancy rates in the 10 – 11% range over the next three quarters.

Overall

Although uncertainties remain within the Orange County office market, tenants and landlords have been able to remain optimistic. Сo-working is a separate office space market segment that has developed rapidly over the past couple of years in Orange County. The growth rate of the flexible or creative office space and its impact cannot be ignored. However, in 2019, we are keeping one eye on the macroeconomic cycle with the expectation that another recession isn’t a matter of if, but a matter of when — and how severe. Also, we are basically at full employment so absorption will most likely be muted in the foreseeable future.

For more information on the Orange County office space market and how to capitalize on real estate opportunities to grow your business, contact Stefan Rogers 949.263.5362 / [email protected].

Click HERE to download Voit’s Q4 2018 Orange County Office Space Market Report.

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Searching Office Space in Irvine, California?

There's plenty of office space in Irvine, from low rise creative office campuses to Class A high rise buildings

The City of Irvine is situated in Orange County, California, which is bordered by Los Angeles County San Diego County, and Riverside County. Irvine is very accessible from all directions, with major transportation corridors, including the 405, 5 and 55 freeways and AMTRAK rail network intersecting the city. Irvine, CA is considered Orange County’s central business district. It also has a highly educated workforce and is considered the 5th most educated county in the USA. 

There’s an excellent choice of Irvine office space for lease if you can find it. There are plenty of Class A and Class B, and Class C traditional and creative office space buildings with a wide variety of office space options. The Irvine Company is a majority owner of commercial buildings in Irvine, but there are plenty of local and institutional landlords too.

Most office space for lease in Irvine is readily available online. However, many office space listings are not readily accessible to the public. VoitWorks provides free access to every office space listing in Irvine, California. We provide complimentary property listing surveys upon request.

No time to search for office space? Get free access to every available commercial real estate listing. Complete the search form and automatically receive a fully-comprehensive survey of available office space for lease in Irvine that fit your needs, delivered directly to your inbox.

If you need help with the office space leasing process, or if you just need some advice or have questions, we can help.

Check out our no-cost Tenant Representation services for further information.l

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What does it cost to hire a an Orange County Tenant Representation broker?

Nothing. Orange County tenant representation brokers are typically paid by the landlord on all commercial leases, by simply sharing the listing fee with the landlord's broker. This fee is typically paid in full whether you're represented or not.

However, while a tenant representation broker in Orange County should not charge you for representation, that really doesn't mean the service is free!

Commercial real estate leasing commissions are typically factored into a building's financial proforma, and end up comprising a percentage of the rent paid, typically between 4-6% of the total contract base rent over the lease term. So, as a tenant, you're effectively paying for the benefit of a tenant representation advisor whether you have one or not, on all new commercial leases.

The trick here is obviously to hire a tenant representation advisor to not only recoup the leasing commissions you're subsidizing in your rent, but to find a tenant representation advisor that you trust to do a lot more. Like everything else, smart business leaders outsource and delegate everything outside of their core competency.

However, there's an inherent conflict of interest in hiring a representative who's compensation is not only paid by the landlord (the guy you're negotiating against), but based off the monetary value you create for them. A competent Orange County tenant representation broker should be capable of negotiating savings well in excess of the standard leasing commission, while saving you a lot of valuable time and stress in the interim, so you can stay focused on your business. By doing this, they're proving their value and earning your trust for future business and referrals, while complying with their fiduciary obligation to represent your best interests.

Orange County Tenant Representation

In Orange County tenant representation brokers typically receive 4% of the total contract rent on a new office lease, and between 2% and 4% of the contract base rent on office lease renewals. On industrial properties, an Orange County tenant representation broker typically receive 3% of the total contract base rent.

Orange County tenant representation is so commonplace now that most businesses have grown to rely on it to save valuable time, for cost control and risk management. And because the workplace has a bigger impact on a business than ever before, directly impacting branding, recruitment, retention and productivity for example. Landlords have their own advisors, so why wouldn't a tenant?

Here are some great examples of the results our Orange County Tenant Representation services have achieved for our clients.

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Understanding the 3 Commercial Real Estate Lease Types

There are 3 basic Types of Commercial Lease Types - Full Service Gross, Modified Gross and Triple Net

It's essential to understand the nuances of each commercial lease type before you start shopping for office space:

What is a Full Service Gross Lease?

In a full service gross lease, the rent is inclusive of base rent and all operating expenses, including utilities and janitorial services. The landlord uses the rental income to pay for all the building expenses and services, including property taxes, insurance, and maintenance. Data and phone services, parking, and some other ancillary expenses if applicable, are not included in the full service gross rent, and are paid directly by the tenant. A benefit of this commercial lease type is the convenience provided to the tenant of one monthly rent payment, and the ability to budget long term, versus a net rent, whereby the operating expenses may fluctuate more due to unforeseen maintenance for example. The tenant can also focus on its business instead of having to manage its share of the upkeep for the property. Full service gross lease structures are typically used in multi-tenant office buildings, where most tenants' utility usages are comparable. Full service gross leases are the commercial lease type generally favored by tenants more than triple net leases. It's important however to understand that full service gross leases don't completely protect you from unforeseen operating expense increases. Most full service gross leases contain language enabling landlords to pass back to their tenants any increases in the operating expenses over and above the first year of the lease. Operating expense pass-throughs and base years are common pitfalls for tenants and generally lead to an unpleasant surprise in year two of a lease if not addressed during lease negotiations.

What is a Modified Gross Lease?

The second commercial lease type is Modified Gross, which is simply a compromise between a gross and net lease. It's basically a full service gross lease, with specific individual operating expenses paid directly by the tenant in addition to the gross rent. Modified gross leases typically break out electrical and/or janitorial services from the full service gross rent equivalent. The modified gross lease is most suitable commercial lease type for tenants that have electrical power requirements outside the norm, that landlords would otherwise find prohibitive on a full service gross lease.

What is a Triple Net (NNN) Lease?

The third commercial lease type is Triple Net, where the tenant pays the base rent and in addition three primary operating expense categories, hence the "NNN" definition. These categories include A.) a CAM (Common Area Maintenance charge), to cover the landlord's property management, waste, water, landscaping and general maintenance, B.) property taxes, and C.) building insurance. In addition to the base rent and NNN charges, the tenant also pays their own utility charges for the subject premises, contracted direct with the service provider. Landlords typically estimate expenses and charge tenants a portion of these expenses based on their proportionate, or pro-rata share. Triple net leases are generally the most landlord-friendly commercial lease type, and tenants should always scrutinize NNN charges and negotiate limits on the amounts they can be increased annually. NNN charges can also fluctuate monthly as operating expenses increase or decrease, making it harder for a business to forecast and budget their occupancy costs. Triple net leases are most suitable for industrial and retail multi-tenant properties where each individual tenant's operating expenses can vary greatly, and can't be managed under a gross lease structure. Operating expense cost savings are passed on to the tenant rather to the landlord.

Summary of Triple Net, Modified gross, and Full Service Commercial Lease Types

When comparing commercial lease types, its important to understand what operating expense categories are due in addition to the base rent, what those amounts are, and if they're trending up or down. On face value, a triple net lease rate may appear artificially lower than a full service gross rent, but could end up costing a lot more in the operating expenses aren't fully understood. Overlook operating expenses and you may regret it. Conducting a thorough operating expense analysis with your tenant representation advisor will  help you compare suitable properties on a comparable cost basis. It will also give you the insight and negotiating leverage you need to get landlord's competing for your tenancy and ensure you negotiate bottom line economics on your new lease.

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CFO'S GUIDE TO COMMERCIAL REAL ESTATE SALE & LEASEBACK TRANSACTIONS

What are the benefits of a Sale & Leaseback transaction?

While sale & leaseback transactions may be structured in a variety of ways, a basic sale-leaseback transaction can benefit both the seller/lessee and the buyer/lessor. The greatest benefit of a sale & leaseback transaction is the ability for the owner / occupier to increase their financial flexibility. By becoming both the lessee and the seller, the owner occupier negotiates from a position of strength to ensure that they maintain uninterrupted control of the facilities; and perhaps, more importantly, they free up capital to invest in their core business. In the context of easing returns from cash and uncertainty surrounding the performance of equity markets, steady and long term yields make the sale & leaseback transaction a popular investment solution for businesses that own their commercial real estate.

What is a Sale & Leaseback transaction?

A sale & leaseback transaction is typically a commercial real estate transaction in which one party sells its corporate real estate assets to another party. The seller then leases the property back at a rental rate and lease term that is acceptable to the new owner. The lease term and rental rate are based on, among others, the new owner's financing costs, the lessee’s credit rating and market rates of return. A sale & leaseback transaction entails the sale of corporate real estate and the simultaneous commitment to a long-term lease of generally 7 to 10 years. This combination allows a company to redeploy the capital that had been invested in real estate back into the core business. The sale & leaseback transaction may include either or both the land and the improvements. Lease payments typically are fixed to provide for amortization of the purchase price over the term of the lease plus a specified return rate on the buyer’s investment. The typical lease structure is a triple net (NNN) one, placing the entire maintaining and repairing obligation upon the lessee. Sale & leaseback transactions often include an option for the seller to renew its lease, and on occasion, repurchase the property.

Why would I consider a Sale & Leaseback transaction?

Raising funds through a sale & leaseback transaction offers property owners a number of important business advantages.

Converts Equity into Cash

With a sale & leaseback transaction, the seller regains use of the capital that otherwise would be tied up in property ownership. At the same time, the seller retains possession and continued use of the property for the lease term. The seller usually receives more cash with a sale-leaseback than through conventional mortgage financing. For example, if the transaction includes both land and improvements, the seller receives 100% of the property’s market value (minus any potential capital gains tax). In comparison, conventional mortgage financing normally funds no more than 70 percent to 80 percent of a property’s value. Because capital gains tax reduces the cash from the sale, a sale-leaseback where the property is sold at a small gain or at a loss generally is most advantageous. Companies can utilize the cash for corporate business acquisitions, equipment purchases and debt reductions business expansions.

Alternative to Conventional Financing

The seller usually can structure the initial lease term for a period that meets its needs without the burden of balloon payments, call provisions, refinancing, or the other issues of conventional financing. Moreover, the seller avoids the substantial costs of conventional financing such as points, appraisal fees, and some legal fees. A sale-leaseback also usually provides the seller with a level of flexibility via renewal options, while conventional mortgage financing has no guarantee for refinancing.

Possibility of Better Financing

Under a sale & leaseback arrangement, a buyer may be able to obtain better mortgage financing terms than the property owner. Even if the property owner defaults, the buyer is likely to continue payments to protect its equity. Thus, the lender might be willing to charge the buyer a lower interest rate, which could result in lower lease payments to the seller.

Improves Balance Sheet and Credit Standing

In a sale & leaseback, the seller replaces a fixed asset (the real estate) with a current asset (the cash proceeds from the sale). If the lease is classified as an operating lease, the seller’s rent obligation usually is disclosed in a footnote to the balance sheet rather than as a liability. This results in an increase in the seller’s current ratio, or the ratio of current assets to current liabilities — which often serve as an indicator of a borrower’s ability to service its short-term debt obligations. Thus, an increased current ratio improves the seller’s position for borrowing future additional funds. However, if the lease is classified as a capital lease, the advantages of the sale-leaseback arrangement from an accounting perspective are altered considerably. Statement of Financial Accounting Standards No. 13 on accounting for leases requires that a capital lease be recorded as an asset and capitalized and requires the obligation to make future lease payments to be shown as a liability.

Avoid Debt Restrictions

Businesses restricted from incurring additional debt by prior loan or bond agreements may be able to circumvent these limits by using a sale & leaseback. Rent payments under a sale & leaseback usually are not considered indebtedness for such purposes, thus a business can meet its cash needs through the sale & leaseback transaction without violating any previous agreements.

Deterrent to Corporate Takeovers

Undervalued real estate on a company’s books often serves as a target for corporate raiders. A timely liquidation through a sale & leaseback transaction may serve as a deterrent, providing management with funding to resist the takeover. In addition, a long-term lease is not as inviting to raiders as undervalued real estate.

Avoids Usury Limitations

Because a sale & leaseback is not considered a loan, state usury laws do not apply; a buyer in a sale & leaseback can earn a higher rate of return on its investment than if it had made a conventional mortgage loan to the property owner.

Income Tax Implications

It is important to understand that sale & leaseback transaction arrangements result in income tax implications for both the buyer/lessor and the seller/lessee. We recommend consulting your tax advisor before relying on the general information herein.

Summary

In summary, a sale & leaseback transaction provides the ability to free up capital at as an attractive alternative to conventional and alternative financing. This can be of great benefit to a business, allowing the ability to redeploy these funds into core business activities and achieve a better rate of return. From a seller’s perspective, lease rate trends typically lag behind sales price trends, so factoring in favorable occupancy costs while maximizing value can provide notable negotiating leverage. Given the recent volatility and unpredictability in global markets, and the general consensus that such behavior is now the new normal, a solid commercial real estate investment asset with strong credit tenants and steady long-term yields is just as appealing as ever.