Irvine’s Crown Realty & Development Corp. is rethinking plans to build a 180,000-square-foot office building in Santa Ana amid higher prices for steel, concrete and lumber.
The developer originally planned to start construction on the six-story high-rise at Xerox Centre last year.
As steel prices rose 30% to 40%, the company put the idea on ice.
Now it’s back to square one.
“Crown Realty is still considering Xerox Centre a viable development site, but is reviewing options based on market conditions,” said Scott San Filippo, chief operating officer of Crown, in an e-mail. “We are assessing rising construction costs, tenant demand and joint venture partnership interest from several perspectives.”
Developers across the county are wrestling with price jumps for steel, concrete and other materials. The hikes started last year just as developers began to seriously consider speculative high-rise construction.
OC’s office vacancy rate, now 7%, has fallen steadily since last year. Any rate below 10% is a sign of a strong office market, developers said.
Price jumps for steel have moderated in recent months. But overall materials and labor costs still are rising 10% to 15% a year in OC and other West Coast markets, according to Douglas Holte, a senior vice president in the Irvine office of developer Hines Interests LP.
Irvine Co.’s planned towers in the Spectrum: first speculative office buildings in some time
Houston-based Hines and Fort Worth, Texas-based Crescent Real Estate Equities Co. plan to start construction on a $90 million, 12-story tower in Irvine in January.
Holte said when his company worked out a budget on the tower in April, it anticipated rising costs.
“We are definitely seeing some office development projects get cancelled or delayed because of unanticipated cost increases,” Holte said.
He said costs are rising on labor and management positions as well.
The volatility of material prices make it difficult to predict where they will settle, according to Dennis Katovsich, senior vice president in the Newport Beach office of St. Louis-based McCarthy Building Cos.
He said the final impact of the hurricanes in the Gulf Coast region on prices of materials still is unknown.
That region’s government officials and developers have concentrated on planning what to build in New Orleans and elsewhere. The real impact will come once builders start major construction, he said.
“We are really sort of sitting and waiting for the long-term impact of Katrina,” he said.
Other developers are confident that OC’s office market can handle some new office buildings.
“I don’t think anybody is disputing the fact that construction costs have been escalating over the last year and are likely to continue, given building demand from China and others,” said William “Bill” Halford, president of The Irvine Company’s office division, in an e-mail. “The impact that it will have on new development is not entirely clear. However, one of the impacts is clear: The rents that will be necessary to support new development will be significantly higher than they have been historically and may continue to grow as construction costs grow.”
That should prove OK for OC developers, Halford said.
“I see further decline in vacancies, which should result in rents moving north and ultimately leading to new development,” he said.
The Irvine Co. is set to start construction this month on twin office towers in the Irvine Spectrum.
Developers have been talking up speculative high-rise plans for two years.
When the Irvine Co. breaks ground on its project this month, it will become the first developer to start building a speculative tower in this recent real estate cycle.
Officials with Los Angeles-based CommonWealth Partners LLC began promoting an 18-story speculative tower in Costa Mesa in late 2003. After more than a year of inaction, CommonWealth sold the property to Los Angeles-based Maguire Properties Inc.
Near John Wayne Airport, Houston-based Transwestern Commercial Services once was poised to develop the area’s first speculative tower with money partner Philadelphia-based Cigna Corp.
Now industry sources said Cigna is shopping around for an equal partner in the planned high-rise as well as the office park Irvine Center Towers. Transwestern would be bought out if a deal is reached, with the buyer likely taking over construction, sources said.
It’s fairly common in the industry for a developer to announce a speculative tower with the hope of luring an anchor tenant,thus lowering the risk of building by eliminating some speculation.
After signing two big leases, Maguire Properties is set to break ground later this year on a 20-story tower at Park Place in Irvine.
As for Crown Realty, it may be eyeing new zoning rules under discussion in Santa Ana.
Santa Ana planners are looking at special zoning to mix homes with shops and offices in a 145-acre site along Fourth Street between the Santa Ana (I-5) Freeway and Tustin Avenue. Xerox Centre is in the area.
The city is following the example of Anaheim, which created optional mixed-use zoning around Angel Stadium of Anaheim.
Crown Realty has “had some discussion regarding residential,” said James O’Neil, executive vice president of development.
