DRAWING POWER
OC’s New Buildings Are Finding Takers in Downturn
By DANIEL D. WILLIAMS
Call it a real estate truism: prime new office space is apt to find takers, even during downturns.
Despite a marked reversal of the Orange County office market in the past year, there’s not a white elephant so far among the county’s latest crop of office buildings. From Anaheim to Aliso Viejo, nearly all developers of new or planned class A office space have managed to lure anchor tenants.
The marquee names taking up in the county’s newest buildings,including GE Capital Corp. and Safeco Corp.,are welcome additions for developers. Many of them laid the groundwork for their projects during a different era of rising rents and scarce space.
While developers are breathing a sigh of relief, most only can declare partial victory. Even with some big tenants, all of the latest new buildings have room to spare.
And what price are developers paying for big-name tenants? Rents and concessions vary by project, real estate sources said. But one thing is clear: class A space won’t set you back what it did a year ago.
“We’re back to the year 2000 rates,” said Steve Case, senior managing director with the Orange County office of CB Richard Ellis Services Inc. “2001 was the peak. But during the second half of last year, prices stabilized and then began to move down.”
And then there’s the flipside: As big-name tenants head for new buildings, they’re leaving big holes in their wake at older buildings, and landlords scrambling to fill them (see related story, page 52).
Four class A projects are being built or are in the works in OC. Two others,The Koll Company’s second phase of Koll Center Irvine North and Summit Commercial Properties Inc.’s Stadium Gateway in Anaheim,finished last year.
The others are Walnut-based Shea Properties’ first phase of Vantis in Aliso Viejo; Opus West Corp.’s second phase of Opus Center Irvine; a 148,346-square-foot building going up at Irvine’s Park Place; and Trammell Crow Co.’s 383,250-square-foot office campus planned next to the Arrowhead Pond of Anaheim.
All but the Park Place project preleased space to an anchor tenant before building began.
While Vantis and the Trammell Crow project still have speculative phases to them, don’t look for any new construction in search of tenants for a while, said Jerry Holdner, vice president of market research with the Anaheim office of Voit Commercial Brokerage: “Construction in the office market is half of what it was at this time last year,” he said.
Even so, the market shows some signs of bottoming out, Holdner said.
“Vacancy only went up a tenth of a percent last quarter, so we’re seeing a stabilizing effect,” he said. “Also, we had positive net absorption of 300,000 square feet last quarter. That’s a huge difference from the negative 800,000 square feet we have the same time period last year.”
The slowing construction is a plus for the few class A projects in play, Holdner said.
“There always seems to be a market for new space, and since we’re not overbuilding, that’s a good thing,” Holdner said. “I think this space will get absorbed, but probably not as quickly as the owners would like.”
Consider the eight-story second phase of Koll Center Irvine North, which was completed in the fourth quarter, adding 172,000 square feet of class A space to the high-rise market in the John Wayne Airport area.
Koll landed a couple of big-name tenants, Salomon Smith Barney Inc. and Aon Corp., and was 27% leased in the fourth quarter. Chicago-based Aon consolidated four local offices at the Koll building at 1901 Main St.
But the building accounted for nearly 30% of the negative absorption seen in the high-rise market in the first quarter. The building now is about 55% full with the addition of GE Capital.
Here’s a look at the other projects:
Opus Center Irvine, Phase II
The second phase of Opus Center Irvine, a 307,000-square-foot high-rise at 2050 Main St., got a big boost when Newport Beach-based law firm Knobbe, Martens, Olson & Bear, LLP said it’ll move in when the building is done in September.
Knobbe Martens signed a 10-year lease for 120,000 square feet, making it the anchor tenant of the 14-story tower at The Irvine Concourse, across the street from Koll Center Irvine North. The law firm, known for patent work, plans to move from Newport Center.
Landing Knobbe Martens was a coup for Phoenix-based Opus West, which counted 37% of the building preleased with the deal.
“Any time you’re talking about preleasing, you’d like to be at 25% to 50%,” said Paul Marshall, senior vice president with Opus West.
Now Opus West faces the task of filling the rest of the building,the airport area has a 17% vacancy rate. The developer is taking a broad view, according to Marshall.
“For the short term, there is lots of sublease space on the market, but in the long term there is very little new space going up,” he said. “(Capital) markets are making new construction more difficult and the overall economy has made developers more cautious.”
Stadium Gateway
Calabasas-based Countrywide Home Loan Inc. got the ball rolling on Anaheim’s Stadium Gateway when it agreed to take 44,000 square feet at the 270,000-square-foot building next to Edison International Field. Countrywide workers are set to move from an office outside OC to the entire fourth floor.
Countrywide has been joined by technology school operator New Horizons Worldwide Inc. with 84,000 square feet and Toyota Motor Credit Corp. with about 19,000 square feet. Just recently, Anaheim-based Alliance Imaging Inc. said it plans to take the top floor of the six-story building.
The project’s developer, Summit Commercial Properties, is part of El Segundo-based real estate investor Highridge Partners Co. Mack-Cali Realty Corp., a New Jersey-based real estate investment trust, is a partner in the project.
Stadium Gateway has drawn tenants because class A space isn’t as common in North County.
“The market offers a good value for office users,” said Chris Shea, a broker with Transwestern Commercial Real Estate Services.
Park Place
The Park Place project braved the market and started construction on the six-story, 148,346-square-foot office building on a speculative basis. Plans call for a September completion.
Little is known about the project. The builder is 3121 Michelson LLC, an investor group whose partners aren’t known. Michael Dorsey and Dave Kinney of Cushman & Wakefield Inc. are marketing the project, but didn’t return calls for this story. So far, the building doesn’t have any tenants according to sources and market tracker CoStar Group Inc.
Vantis
The 40-acre, $350 million class A project being built at the Aliso Viejo Town Center cleared a big first hurdle by landing Seattle-based insurer Safeco as the anchor tenant for its first phase.
Safeco is set to occupy space in the first Vantis building, a 175,000-square-foot, five-story structure slated for completion in the first quarter of 2003.
“Safeco is taking 75% of the building,” said Tim Joyce, a vice president with the Irvine office of Colliers Seeley International Inc., which is handling Vantis leasing. “That leaves us with 50,000 square feet to lease at this early stage, and we’re already looking at proposals.”
Interest is coming from smaller tenants, in the 5,000 to 10,000 square foot range, Joyce said. But he said he believes the market is nearing an upswing, which could pull the bigger players off the sidelines.
The entire Vantis project calls for 1.5 million square feet of office space and 30,000 square feet of retail space after a seven-phase buildout planned for 2007.
Arena Corporate Center
Last fall, the Irvine office of Dallas-based Trammell Crow said it planned to bring a 383,250-square-foot office campus to one of OC’s prime undeveloped parcels: a 24.5-acre lot behind the Arrowhead Pond.
Plans call for three, two-story office buildings. Each is set to total 127,750 square feet and form an “L” around a central plaza area and parking lot.
The project landed its big fish in April when Syndicated Office Systems, a unit of Santa Barbara-based Tenet Healthcare Corp., signed a 10-year lease for 127,750 square. Financial Terms were not disclosed. Around 650 Systems employees would move to the new digs sometime next year.
A Syndicated Office spokesman said the central location and more space were the big reasons for the move.
At one time, the land space was designated as residential and agricultural land. In 1998, the property was reclassified for commercial development, and plans were to construct a 982,000-square-foot, mixed-use center, including a 10-story and two six-story office buildings.
That plan expired in February, and the Trammell Crow project was brought to the table. The property has been vacant since Orange Tree Mobilehome Park moved out, nearly four years ago.
Although bulldozers are moving dirt and Syndicated will take about 40% of the three-building Arena Corporate Center, at least one industry insider has speculated that the project will need more preleasings to see buildout.
