Commercial Development Slows After ‘Peak Year’ in ’98; Tight Land Market Cited
Orange County’s major developers added less commercial space to the area’s inventory in 1999, a reflection of the depletion of ready-to-build land and another measure of how strong the market was in 1998.
The 25 largest OC companies developed 13.6 million square feet of commercial space in 1999, a decline of 17% from the 1998 total of 16.4 million. These same firms started 71 projects in 1999, a 31% drop-off from the 103 new developments launched in 1998.
“It’s a competitive damn marketplace in Orange County,” said Kim Snyder, managing director of Insignia/ESG Inc.’s local development operation, which is ranked No. 14 on the list with 406,000 square feet developed last year, a 46% decline from 1998. “The availability of development opportunities has severely diminished over the last three to four years such that large-scale projects like we used to have simply don’t exist anymore. It’s a very mature market right now.”
The slowdown in construction also was reflected in the total value of commercial activity by the 25 developers, whose aggregate projects totaled $967 million last year, a 22% decline from their 1998 total.
(Unlike most Business Journal lists, this year’s ranking of commercial developers is not being compared to last year’s list because of a change in ranking criteria, from square feet developed in the first half of the year to square feet developed in all of the previous year. All comparisons are between the 1999 performance of the companies on this year’s list and their numbers for 1998.)
But while activity levels declined in Orange County, employment levels among the top 20 firms on this year’s Business Journal list rose. Employment at these firms stood at 970 this year, a 7% increase from 1999 levels.
A lot of companies, finding the supply of land restricted in OC, have increased activity in other markets, accounting for the jump in employment levels.
“The focus of our activities has moved north,” Snyder said. “We ended up doing projects in Sacramento and the Silicon Valley.”
Heading the list is Irvine-based Legacy Partners, which developed 1.7 million square feet of space in 1999, a 27% decline from its 1998 activity. The Irvine Co., OC’s dominant landlord and landholder, was ranked No. 2 with 1.6 million square feet developed in 1999, a 24% decline from the previous year.
The Irvine Co., one of the few developers in Orange County that has the available land to meet any market shortfall, is ramping up its construction pace this year with 35 buildings under construction so far.
Richard G. Sim, a senior vice president with the Irvine Co., said it is not surprising that activity would be down from 1998’s “peak year” levels. But that decline should not be interpreted as a softening in the market, he said.
“I’ve got 35 buildings already under construction in the first six months of the year. That’s more than we built all of last year,” Sim said. “By producing product to market demand, we’re balancing supply and demand. In the ’80s people assumed demand would (always) be there and they went crazy.”
Of the companies on the list, 11 posted declines in OC square footage developed in 1999 compared with 1998, one was unchanged and seven saw an increase in activity. Shea Properties did not provide 1998 numbers.
Mirroring this trend, 11 firms reported having started fewer projects in 1999, while four remained unchanged and four increased their activity levels. Again, Shea Properties did not provide numbers for comparison.
One of the companies posting an increase in activity was No. 7 Gale & Wentworth California LLC, with 706,914 square feet developed in 1999, a 22% increase from 1998.
Patrick L. Murphy, managing partner of the Irvine-based office, attributed the increase to an accelerated development schedule due to strong leasing activity in its Pacific Commercentre business park in Lake Forest, built on 33 acres the company acquired in 1987, when land was more plentiful. The initial business plan called for buildout of the project to occur over a 36- to 48-month period, but the company has pushed that to less than 24 months.
“We accelerated that program and executed it well ahead of schedule because of being able to do the build-to-suits with tenants,” Murphy said.
Such strong activity, so evident during the mid- to late ’90s, is a reflection of the pent-up demand from the long recession, said R. Scott Bell, president of No. 10 ICI Development Co., which developed 515,000 square feet in 1999, a 26% decline year-to-year.
“There was a lot of pent-up demand starting probably in 1995 or 1996 and we were basically filling a void that had been there after the recession,” he said. “Then, after that backlog of pent-up demand is filled or satisfied, you get to a more stabilized construction pace.”
Greg Knapp, president of No. 18 Brookhollow Group, said his firm continues to look for opportunities, but like others has found the land market constraining.
“When we look at what’s in the (development) pipeline we have to look longer and harder for opportunities,” said Knapp, whose company developed 264,648 square feet last year, a 43% dip from 1998. “Land prices have escalated, and it’s harder to find returns that we think are appropriate given the level of risk.
“If we had the same land we had available to us in 1998, we’d be doing the same or more right now,” he added. n
