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Finished Offices Last in Building Pipeline

Orange County’s office construction boom is officially at an end.

With the recent completion of two midsize buildings in Santa Ana and Newport Beach—totaling a little more than 100,000 square feet of space—there’s now no significant office construction under way here, according to the latest data from real estate brokerages.

Just off the Costa Mesa (55) Freeway in Santa Ana, Laguna Hills-based Muller Co. is taking off the wraps on an 80,000-square-foot office building on North Tustin Road.

The four-story building is next to an existing 200,000-square-foot office building Muller owns and that serves as the headquarters of real estate brokerage and investor Grubb & Ellis Co.

In Newport Beach, Far West Industries Inc. of Santa Ana recently completed a 23,435-square-foot office at 1375 Dove St.

No one’s predicting a rush of more speculative office construction anytime soon now that the two projects are done.

With office rents falling some 20% or more in the past two years, local developers and brokers think it might take five years before the market returns to a point where breaking ground on any significant projects could be seen as a financially viable decision.

It’s a rapid change in fortunes for OC’s office market, which saw close to 7 million square feet of space open from 2006 to 2008, before economic realities put the kibosh on projects across the county.

For Muller and Far West Industries, opening their buildings at the tail end of the latest development cycle is proving to be a challenge.

Without any tenants already signed on for the buildings, the developers are lowering rents from what was initially expected.

There’s still room for optimism. Both developers are eyeing their projects as long-term investments and expect to remain in control of their offices once the dust settles. That’s something that can’t be said for other larger buildings that have opened in the past few years.

“The good news is that we’re not dealing with debt,” said Scott Lissoy, Far West’s president.

Far West, which also is a Southern California homebuilder, bought an existing 75,333-square-foot office and land on Dove Street in 2006. The office previously served as the headquarters for Impac Mortgage Holdings Inc. prior to its moving to its current Jamboree Road building.

In addition to revamping the existing six-story building at 1401 Dove St., Far West opted to go ahead with building a smaller, 23,435-square-foot office on the property before entitlements on the site expired.

‘Eye of Storm’

The new three-story building, built by Brea’s KPRS Construction Services Inc. and designed by Irvine’s Ware Malcomb, ended up opening “in the eye of the storm,” Lissoy said.

The Dove Street acquisition was paid for with cash. Construction was funded with Far West’s existing resources, so there aren’t any debt concerns for the development, according to Lissoy.

“We don’t have a gun to our head,” he said. “We’re not going anywhere.”

The company has “readjusted expectations” for the building, according to Lissoy. Monthly rents are being listed at $2.40 per square foot.

Far West originally made the deal for the office space and land as a way to diversify before the slowdown in the housing market.

The subsequent office market downturn has prompted developers to lower rents. In years past, most developers expected to get more than $3 per square foot a month to help recoup construction and land costs.

Muller is listing monthly rents for its new building in Santa Ana at $2.50 per square foot. When the project broke ground, the developer and its partner in the project—a client of New York-based money manager BlackRock Inc.—were asking $3.25 per square foot.

The developer’s looking to find an existing Central County business that wants new office space but isn’t interested in relocating to the Irvine area, said Greg May, senior vice president for the Newport Beach office of Grubb & Ellis.

Companies in Central County often end up renewing instead of relocating because there are so few buildings that have been built within the past five years, said Muller principal Jon Muller, at the time the project broke ground.

There’s been some recent attention from local companies interested in leasing the entire Muller building, said May, who is part of the building’s leasing team along with Grubb’s Oliver Fleener and Jon Swallow.

May, Fleener and Grubb’s Michael Anderson also were given the leasing assignment for Far West’s two Dove Street properties last month.

Options

The brokers have options on how to market the Far West buildings. They can be sold or leased as individual condominiums. Fleener said the company has not ruled out selling each building or the whole project at some time down the road.

The Far West and Muller offices were part of the roughly 250,000 square feet of office space that was completed in OC in the past year.

The record year for new development was 1988, when 5.7 million square feet of new space was added, according to Voit Real Estate Services. In the most active period of the most recent commercial real estate cycle, developers finished building about 4.2 million square feet of office space in 2007. Most of those projects broke ground in 2005 and 2006, when office vacancy rates ran about 7%.

Now, vacancy rates for the county’s office market—which totals about 108 million square feet—are approaching 20%.

There’s at least 4 million square feet of space that’s been proposed for OC but has yet to break ground. Stalled projects that could still move ahead, assuming tenants are first signed, include developer Mike Harrah’s 600,000-square-foot One Broadway project in Santa Ana, as well as large projects in Tustin and Irvine’s former military bases and in Anaheim’s Platinum Triangle.

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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