Things may be looking up in the office market, literally.
Irvine could become home to Orange County’s first office high-rise built in two years.
The tower planned in the John Wayne Airport area would be a result of a major lease deal, which begs the question: As the office market tightens, will companies needing big blocks of space spur high-rise construction?
Los Angeles-based Maguire Properties Inc. plans to build a 20-story office tower at Park Place in Irvine for New Century Financial Corp., which has its headquarters down the street on Von Karman Avenue.
New Century plans to lease a total of 480,000 square feet at Park Place, including more than 200,000 square feet in the proposed building.
Park Place is a sprawling 105-acre campus at the corner of Jamboree Road and Michelson Drive, about a mile from John Wayne Airport.
Deals like New Century’s happen every once in a while, brokers said. A company needs a big block of space, can’t find anything available in the area it wants to be in and so signs a lease for space in a planned building, brokers said.
Having an anchor tenant committed helps a developer borrow money and start construction.
Other than a few build-to-suit office developments in the past few years, there’s been no high-rise construction in OC.
The tighter the office market, the more likely big lease deals will lead to new buildings, brokers said.
Naturally, an improving economy helps.
The county’s overall office vacancy rate still is somewhat high at 13.5%, according to Cushman & Wakefield Inc.
But the rate shrouds a hidden truth in the office market: There aren’t many big blocks of space available in existing buildings for companies to lease.
In fact, there are 12 existing buildings in the county with 100,000 square feet or more of available contiguous space, according to Scott Johnstone, senior vice president in the Newport Beach office of Grubb & Ellis Co. Voit Commercial Brokerage pegged the total closer to 15.
“The bigger the deal, the fewer the alternatives,” Johnstone said.
Brokers said 12 is a low number for a county with about 90 million square feet of total office space, according to CB Richard Ellis Group Inc.
But Johnstone said office rents generally aren’t high enough to justify new construction.
Prices of steel and concrete have shot up during the past year. At the same time, rents have been mostly flat.
The county’s average rental rate for class A office space is $2.27 per square foot per month, according to Cushman & Wakefield.
A new building needs to command rents of $3 per square foot or more to justify being built, according to Matt Montgomery, senior manager of real estate development in the Irvine office of Phoenix-based Opus West Corp.
Opus built the last office high-rise in the airport area when it finished construction two years ago on a 14-story building at 2040 Main St., dubbed Opus Center Irvine II.
The developer is looking for tenants for another high-rise planned at the Irvine Concourse office complex about a half-mile from the airport, Montgomery said.
The company hasn’t decided if it will build only after signing a major tenant, as it did with 2040 Main St., or build on speculation, as it did with Opus Center Irvine I in 1999, Montgomery said.
“We still have quite a gap between where lease rates are and construction costs,” he said.
Brokers said there are a few companies in the market for large chunks of space.
San Antonio, Texas-based SBC Comm-unications Inc. is rumored to be looking for 500,000 square feet or so, according to sources.
SBC may be considering a lease at the proposed 37-story office tower in Santa Ana by developer Mike Harrah.
The city is deciding whether to rescind its approval of the tower or send the issue to voters.
Sources said other companies rumored to be looking for 100,000 square feet or more are Newport Beach-based Pacific Investment Management Co.; Irvine-based Edison Mission Energy; Reston, Va.-based Nextel Communications Inc.; Los Angeles-based law firm Gibson, Dunn & Crutcher LLP; and Irvine’s Advanced Sterilization Products, a unit of New Brunswick, N.J.-based Johnson & Johnson.
The question, according to brokers, is whether those companies are willing to pay a premium to be the first in a new high-rise.
