Does Irvine Co.'s UTC Rent Cut Signal A Market Downturn?
With delivery of three new office buildings, adding nearly a half million square feet of new office space to the University Towne Centre submarket, Irvine Co. now has 32 UTC buildings with about 4M SF.
“UTC is unique in that the Irvine Co. owns between 50% and 60% of total UTC office stock, making it the majority owner, so whatever they do becomes ‘the market,’” said JLL San Diego EVP Misty Moore, who represents office tenants.
When Irvine Co. raises or lowers asking rates on suites in its portfolio, those assessing the market cannot easily define fair market value for clients, she said. In any building, rates may go up in one suite and down in another.
Moore said Irvine Co. operates in its own ecosystem and has been drawing tenants out of old buildings to populate its new 306K SF, Class-A One La Jolla Center project at 9255 Towne Centre Drive, which has peak rents of $4.55/SF. As a result, Irvine Co. is lowering rates on certain suites in older buildings that have been on the market awhile to reduce vacancy, which could affect asking rates throughout the UTC submarket.
The company is raising rates on the most desirable suites in the same buildings. A Irvine Co. spokesperson said desirability is based on the floor level of the office suite, view and other features.
“At some point, others have to follow suit,” Moore said.
Moore said once occupancy is up, she expects Irvine Co. will push rates higher than anyone else, and again, everyone else will follow.
“We continuously and extensively study our customers and business trends,” said John Turner, regional vice president for Irvine Co. office properties. “Because of the breadth and vibrancy of our workplace communities, we are in a unique position to provide a highly flexible and dynamic marketing and lease-up process."
He said Irvine Co.'s unconventional marketing strategy plays a role in that.
"In many cases, our most valuable real estate is never officially marketed to the outside community because of our relationships and knowledge of the ongoing demands and desires of businesses in the region."
Turner spoke of his company’s continued confidence in the region.
“We are 92% leased in UTC with strong ongoing interest, and our new 15-story, vertical campus, One La Jolla Center, will soon be 93% occupied,” he said.
A JLL San Diego Snapshot report found Irvine Co. led the average UTC office asking rate on the way up and is now leading a downward trend.
The report traced rental history, beginning in 2015. At the start of 2015, Irvine Co.’s average UTC office asking rental rate was 5.6% higher than the submarket average; by the end of 2015, other UTC offices had raised average asking rent to a nearly equivalent rate.
Since the beginning of 2016, the overall average asking rental rate for the Irvine Co.’s UTC properties has declined 11.6%, while the overall average asking rent for other UTC offices decreased 7.5% during the same period.
Moore said the average UTC Class-A office rent at the end of Q1 2017 was $3.42/SF, but the asking rent in the Eastgate area of the submarket is $2.72/SF triple net, and overall UTC/Eastgate asking rent is $3.23/SF.
She said direct vacancy in the UTC market is 12% and almost 15% with sublet space.
In Del Mar Heights, American Assets will complete two Class-A two- and three-story office buildings this year at 3420 and 3430 Carmel Mountain Road that will add about 91K SF to the submarket. Additionally, Kilroy Realty Corp. recently broke ground on the One Paseo mixed-use development in nearby Carmel Valley, which will have 280K SF of office space.
Moore said Irvine Co. is a long-term owner and occupancy-driven, but she suggested the company’s leaders have a sixth sense when it comes to predicting the market.
She said the company is good at judging the market and anticipating when to adjust rents. Moore said additional supply recently delivered or in the pipeline may be creating a softening in suburban submarkets.
Turner responded to Moore’s concerns.
“We remain bullish about UTC’s short- and long-term prospects as a world-class place to do business, and we are not alone," he said.
He said $1B in capital investment projects are underway in UTC, which will transform the region into the ultimate live/work/play destination. This includes the $700M makeover of Westfield UTC mall.
CORRECTION, MAY 11, 8:20 P.M. PT: A previous version of this story stated Irvine Co. is lowering rents at some office buildings in UTC, but failed to note rate cuts are on office suites that have sat on the market and the company is raising rates on certain office suites in the same buildings. Moore's concern about a downturn in central San Diego office submarkets is related to the amount of new office space recently completed or in the pipeline. The story also listed the wrong submarket for Torrey Point, which is in Del Mar Heights.
