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New Life for Old Gym Part of Creative-Office Trend

The 20,500-square-foot Newport Beach building that holds the University Athletic Club sports a pair of racquetball courts, a full-sized indoor basketball court, a lap pool and workout equipment—all of which have helped keep real estate, medical, legal and other area executives in shape over the years.

The current owners of the building hope a proposed redevelopment of the 37-year-old property at 1701 Quail St.—a few blocks from John Wayne Airport—will entice developers, doctors and lawyers to make use of the building in a different way: as tenants or owner-users.

A conversion of that type would appear to be a first for the Newport Beach office market.

The owners are marketing the building for sale as a potential state-of the-art medical or creative office property, the latest example of the creative-space phenomenon slowly making its way to Orange County’s somewhat staid office market.

New Wrinkle

Major potential changes for 1701 Quail include removing some of its athletic courts to free space for open offices, a showroom for display of prized possessions, and extra parking for the two-story property.

Any courts or other features of the club that are kept as-is could offer a unique employee amenity to office users, according to Steve Economos, executive vice president for the Irvine office of Jones Lang LaSalle, which has the listing for the property.

A venture headed by Newport Beach-based Hager Pacific Properties bought the formerly financially distressed building out of foreclosure a few months ago for about $2 million.

The real estate investor, known for buying distressed properties and repositioning them, is putting some early-stage renovation work into the building, which remains open to club members, but is exploring major redevelopment options while marketing the property for sale for $4.5 million.

That price factors in an estimated $1 million or so needed to transform the bulk of it to a shell space for an office user. The property’s buyer would then likely spend another $1 million to $2 million to build out the site to their specifications, according to Economos.

“There’s a lot of potential here.”

Economos said initial interest in the property’s redevelopment has been strong, though no one’s made an offer yet.

Slow Going

Though the likes of Hager Pacific’s plans in Newport Beach aren’t too common by OC’s standards, the local market is starting to take after other markets in the state where developers have remodeled office buildings to accommodate a younger generation of workers.

New Norm

Creative offices—which emphasize open work space, fewer individual offices, lots of collaborative space, and a number of employee-friendly perks, like Wi-Fi—are increasingly becoming the norm in tech- and media-heavy markets, such as Silicon Valley, San Francisco and West L.A.

“It’s a (growing) phenomenon,” said Kevin Shannon, vice chairman for Los Angeles-based CBRE Group Inc.

“Up and down the (West) Coast, companies looking to retain new, young talent are looking” for creative space, said Shannon, one of the region’s top brokers for investment sales.

New technologies have reduced the need for traditional offices and storage space for tenants such as law firms. The trend now is for many tenants “not to want vertical offices,” Shannon said. “They like the feel of a campus.”

Creative-office space can offer sizable bottom-line benefits for landlords. All things being equal, it can command a rent premium between 18% and 25%, according to Jones Lang LaSalle Senior Vice President Andy White.

Creative-work spaces in some configurations, in addition to higher-end finishes, can accommodate many more employees per square foot, resulting in the higher rents.

Compared to other coastal markets, though, there’s been more talk than action in OC in terms of creative office development. For the most part, buildings featuring creative space have been confined to a few design, architecture and development companies.

That’s partly reflective of the relative newness of much of the region’s office product, especially in South County, said Matt Montgomery, principal at Newport Beach-based Marshall Property & Development LLC.

“In general, the older the area, the better,” Montgomery said.

So Marshall Property & Development this month turned to an older office market in Los Angeles County for a notable project, buying the former El Segundo headquarters of visual effects company Rhythm & Hues Studios, a building constructed in the late 1970s and early 1980s.

Marshall Property joined New York-based Rockwood Capital for the reported $25 million purchase of the 200,000-square-foot campus, which is set to get a nearly $20 million reinvention into what the new owners are calling a “premier creative office space.”

Improvements are expected to include indoor and outdoor common areas to help facilitate interdepartmental interaction, tenant spaces featuring high, exposed ceilings and more parking to accommodate a potentially bigger staff allowed by the redesign.

“The traditional layout of office space is changing,” Montgomery said. “Everybody is looking for more collaboration.”

El Segundo, recently described by the L.A. Times as “an emerging hot spot for companies in such creative businesses as entertainment, media and advertising,” also is becoming fertile ground for OC developers looking to tap demand for creative-office space.

The old Rhythm & Hues building is about a block from a vacant, five-story office that Irvine-based Bixby Land Co. bought last month in a venture with Hartford, Conn.-based Cornerstone Real Estate Advisers LLC.

Bixby said it plans to spend $10 million on the 112,695-square-foot office, previously occupied by defense contractor Raytheon Co., to make it resemble a resort or boutique hotel.

The building, once renovated, is expected to appeal to “progressive-minded firms that want an alternative workplace,” according to officials with Bixby, which has lately made a niche redeveloping offices into more tenant-friendly workspaces (see story, page 3).

Eyes on Fox Head

For real estate investors trying to gauge OC’s appetite for creative-office space, meanwhile, the most notable property on the market is likely the Irvine office that holds the new headquarters of motocross apparel company Fox Head Inc.

16752 Armstrong Ave., an 82,645-square-foot office about a block from The District shopping center, was a nondescript industrial building until it got an estimated $10 million makeover prior to Fox Head’s arrival this year.

A venture between Shubin Nadal Associates LLC of Newport Beach and Hartford, Conn.-based Penwood Real Estate Investment Management LLC bought the building for a reported $7.5 million near the start of 2012.

The building’s now on the market again, following the signing of Fox Head to a 15-year lease. Real estate sources estimate the property could command a sale price of about $400 a square foot, or about $33 million.

The property now features an open layout intended to cater to Fox Head’s design and sales operations, as well as to executive staff.

The building’s lobby holds a Fox Head store for employees and friends, stocked with branded racing gear, apparel, accessories and shoes. Bleachers at one end of the office space are for staff town-hall-style meetings. There’s a staff library, showroom space for buyers, and open meeting and kitchen space on the ground floor.

Outside, there’s a BMX track and fire pit, and plans are under way for a skate park.

The team of CBRE’s Shannon has the listing for the Fox Head office. He said holders of institutional capital, which is flowing more freely in the economic recovery, are beginning to take more interest in such creative-office properties as investments.

“Two years ago, it was not as easy to sell,” Shannon said. “But they’ve recognized that it’s here to stay.”

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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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