Koll Development Co. and Opus West Corp. led the way in 1998 in the current high-rise building cycle, and many market sources believe they also will be the last ones through the door with their current projects in Irvine.
Real estate runs in cycles and few sectors are more cyclical or as tightly linked to market barometers as are high-rise buildings.
The “high” in high-rise does not stop at verticality.
“There is a different profile of prestige in a high-rise,” said Jeff Bitetti, director of marketing, Nexus Development Corp.
But along with that high profile comes high risk and highly leveraged product, meaning high-rise projects are more difficult to get off the ground that other commercial building ventures.
The current building cycle sprang from very low vacancy rates in the late ’90s, according to Tom Taylor, a senior vice president with Grubb & Ellis.
That’s when Koll and Opus initially struck.
After a nearly 10-year drought of new high-rise products in Orange County, they broke ground in 1998 on a pair of projects within shouting distance of each other in Irvine.
Koll was the first to deliver, in September 1999, with the completion of Koll Center Irvine North, Phase I, a 178,000 square-foot eight-story building at 1900 Main St. (Koll now is completing Irvine North, Phase II, a 178,000-square-foot building at 1901 Main St.)
Opus opened Opus Center Irvine, Phase I, a 268,838-square-foot building at 2020 Main St. the next month.
Opus broke ground last week on Opus Center Irvine, Phase II, a 320,000-square-foot structure at 2050 Main St. and plans to bring it to market next year.
Sandwiched between the Koll and Opus first and second phases, GE Capital put up the 10-story, 230,000-square-foot Lakeshore Towers III building and Nexus brought the Twin Towers of MacArthur Place, two nine-story buildings totaling 400,000 square feet, to market.
Other sites are prime candidates for future high-rises, according to one industry source.
“Segerstrom has a development site that faces Bristol St. off of Anton and another site next to the Performing Arts Theater in Santa Ana. Trammell Crow has a rumored seven-story development in the works, Colton has one off of Michelson and Von Karman, next to the old Apple building.”
Then there is Star Point’s land at Jamboree Road and Campus Drive, where the statues once stood. That site is in escrow, according to the source, but has since been deemed “a moving target. I heard it was a slam dunk, then that it wasn’t. The market’s softening a bit, so now, who knows if they’re going to build? But if they do, then they may need to change to a multi-use building.”
A proposed 10-story addition to Koll Center Newport will be subject to a city wide vote after it gets through the planning process.
And finally, there is the 37-story tower called One Broadway being proposed by Caribou Industries for downtown Santa Ana. Caribou has gotten that plan through the Santa Ana Planning Commission, but whether it will be erected any time in the near future is unclear.
So no other high-rise projects are close to breaking ground. Meanwhile, financing has become problematic. Much of the money these days comes from Wall Street, and recently Wall Street has been very cool to real estate.
“People are a little more cautious now,” Bitetti said. “The money partners are looking cautiously at financing without pre-lease.”
Nexus, for instance, was able to score a major lender to help bankroll the Twin Towers project after it pre-leased 130,000 square feet to MSC.Software.
“I think 100% spec sites would be hard to get the go ahead. It would be difficult to get financing,” said Paul Lentz, Western region president for Transwestern Commercial Services.
A big boost for Koll was landing Aon Insurance for 40,000 square feet for Phase II. Opus West hit a similar gold mine when it nabbed Knobbe Martens, Olson & Bear, which pre-leased the top six
floors of its second phase.
But the roadblocks go beyond obtaining preleasing.
“Financial institutions look at the total playing field,” Bitetti said. “They take everything in consideration,forthcoming vacancy, the construction costs, being able to build it economically and efficiently, a proven track record, availability, good sites, potential tenants, rollover of tenants.
“It was supply and demand (in the late ’90s). Occupancy got very high, tenants wanted and needed something new,” Bitetti said.
“In the late ’90s, we were looking at single-digit vacancy for the first time in decades,” Taylor said.
When vacancy dipped below 7%, it made sense to build, Taylor added.
But the second quarter 2001 office vacancy in OC was 12.6%, and it was 11.7% in the airport area submarket, according to CB Richard Ellis, and those numbers may have to come down to justify the effort and expense of building new high-rise products.
But not everyone is convinced high-rise construction is headed for another eight-year hibernation.
“We’re very bullish on this market,” said Paul Marshall, senior vice president of real estate development for Opus West. “(High-rises) have a fine demand of ebbs and flows. And we’re fortunate that although demand has slacked, new supply has clearly slacked.”
Bill Halford, president of the office properties unit of The Irvine Company, gave high-rise an enthusiastic review.
“The high-rise office market continues to experience good activity, especially among companies that are attracted by the opportunity to occupy smaller spaces in high-quality, multi-tenant buildings,” Halford said. “Companies tend to choose multi-tenant buildings for the flexibility provided in terms of incremental expansion options as well as for the efficiencies associated with having all employees in one location.”
And Russ Parker, a principal with Parker Properties, sees a pause in high-rise market but not necessarily a lasting drought.
“Right now, any product not under construction, I think they will hold back for six to 12 months, and that goes not just with high-rise but also mid-rise,” Parker said. “But I definitely believe we will have more high-rises in the next cycle up.”
For now, though, most indicators point to no more high-rises in this cycle.
Everyone is holding their breath, according to Taylor.
“We don’t think we’ve seen the last of the slowdown,” he said. “We’re in a wait-and-see attitude. Then, when the smoke clears, those on the questionable list will go forward.” n
