Newport Center Holding Its Own; Latest Lease at Record $6 a Foot

Orange County Business Journal, Feb 4-Feb 10, 2008 by Mueller, Mark

REAL ESTATE: Center insulated from office turmoil

Newport Center-the upscale office buildings that surround Newport Beach's Fashion Island-is an island unto itself when it comes to the market for office space.

While vacancy rates in the rest of the county have grown nearly 50% in the past year, Newport Center, which totals about 2 million square feet, is tight with vacancy rates of 5%, according to brokers.

What's more, the legal, finance and other professional service companies that want high-profile space overlooking the ocean remain unfazed by the center's pricey rents.

New deals for the best space in Newport Center now routinely run close to $5 per square foot a month, if not higher. Those are rates closer to the Westside of Los Angeles man the rest of Orange County.

The average monthly rent for OC office space is close to $2.75 per square foot, and more than $3 for the newest and best buildings.

The Irvine Company is Newport Center's dominant landlord and has its headquarters there. One recent deal for space at an Irvine Co. tower-for a new office of Merrill Lynch & Co.-is believed to have broken the $6 mark, setting a record high for the county, according to real estate sources.

Those levels would put the buildings on par with the most expensive offices in Southern California, alongside some of the upscale towers in parts of Los Angeles.

Most tenants at Newport Center tend to be lawyers or investment bankers, or smaller entrepreneurs, including doctors, who want an office close to meir homes in Newport Beach.

"There are not many tenants in between," said Royce Sharf, executive vice president for the Irvine office of brokerage Studley Inc.

With Newport Center tenants, "There's a different approach to image, and they have a different level of pain tolerance" with respect to rents, Sharf said.

Merrill Lynch's recent deal proves that point.

The investment bank just signed a 10-year lease for an office at 610 Newport Center Drive, an 18-story tower that includes the OC offices of Los Angeles-based law firm O'Melveny & Myers LLP.

Merrill Lynch, which already counts about 370 employees spread among six OC offices, plans to open the Newport Center office in the second quarter, company officials said.

The deal was for 7,400 square feet of space on one of the top floors of the building.

"The space faces the Pacific Ocean-it's a phenomenal view," said Myron Galchutt, managing partner for the Irvine office of Newmark Knight Frank, which represented Merrill Lynch in the lease.

The space was in demand and saw a number of bids, including from O'Melveny, the fifth-largest law firm in OC, which was believed to be looking to expand its space at the building.

That bidding war likely pushed the Merrill Lynch lease past the $6 per square foot mark, according to sources.

Galchutt declined to address the specifics of the transaction, including lease rates.

"It was a very intense negotiation," he said.

The Irvine Co. owns 11 office properties in the 600-acre ring of buildings surrounding Fashion Island, including office towers and low-rise buildings. The company's buildings are more than 95% full, officials said.

Another two buildings for lease in the area are owned by Pacific Investment Management Co., a bond fund manager that has its headquarters in Newport Center.

The highest price for Newport Center office space listed on the Irvine Co.'s Web site is $5.15 per square foot, also at 610 Newport Center Drive.

Most of the Irvine Co.'s office tower space in the area is listed at $4.50 to $5 per square foot.

While there's a big gap between asking rents and what tenants actually are signing on for elsewhere in the county, in Newport Center asking rates are being met, brokers said.

"It is the only market in Orange County that's actually holding firm and even is seeing a lot of appreciation," said Randall Parker, managing director for Newport Beach-based brokerage Travers Realty.

Besides Newport Center, the only buildings in OC seeing comparable asking rents are near South Coast Plaza in Costa Mesa.

The Offices of South Coast Plaza, the office division of C.J. Segerstrom & Sons LLC, said last year it was beginning to market the top floors of space at its premier office building600 Anton Blvd.'s Plaza Tower-at $6 per square foot. No deals in that range have been announced.