Buoyant office and industrial markets translated into a big upswing in commercial development starts in 2005, though few of those projects were finished during the year.
The disparity between new starts and project completions resulted in what at first looked like another down year for developers with a local office, according to this week’s Business Journal list. The list is ranked by square feet of finished development in 2005.
OC’s top 31 developers completed 3.5 million square feet of commercial space here in 2005, an 8% drop from the 3.8 million square feet built in 2004.
That follows a 16% drop by the companies on the list the previous year.
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But commercial development has picked up considerably from the past few years, with several high-rise office towers leading the way.
Those towers, being developed by The Irvine Company, Hines Interests LP, Maguire Properties Inc. and Opus West Corp., among others, won’t be finished for a year or two. They’ll boost results in future years.
“The reality is that development is a fairly lengthy process, which naturally creates a gap in the response to market vacancies,” said Paul Marshall, president and head of the Irvine office of No. 15 Phoenix-based Opus West.
The commercial development list traditionally has some big swings year to year, both in terms of project totals and the companies on the list. This year was no exception.
Since the totals for individual companies are determined when a project is completed, completion dates can have a big impact on a company’s placement on the list.
No. 5 Irvine Co. last year broke ground on one of OC’s largest developments in years: a nearly 700,000-square-foot expansion of its University Research Park campus at the University of California, Irvine.
The eight-building project, which will be anchored by Broadcom Corp., is under construction so it doesn’t show up on this year’s total.
The Irvine Co. now has close to 2.2 million square feet of office development under construction, including projects it began this year,far more than any other developer. But it only had about 270,000 square feet completed in 2005.
It’s not uncommon for a developer to be at the top of the list one year, and to show no projects completed the following year.
A number of companies who showed no work being completed last year still appear on this year’s list,a reflection that they are expected to bounce back in 2006 or because they’ve been busy building outside OC. They’re on the list based on historical development in the county.
Ramping Up
Developers are being spurred into action by office vacancy rates that dropped 37% to 6.2% last year, according to CB Richard Ellis Group Inc. Rates subsequently dropped closer to 6% at the end of the first quarter.
Meanwhile, office rents have finally increased enough to justify construction, developers say. OC rents rose 5% to $2.16 per square foot last year, according to CB Richard Ellis. They jumped to $2.29 per square foot by the end of the first quarter.
“Rents have just now increased to a point where the large cost increases of over a year ago can be covered,” Marshall said.
The consensus among developers is that a monthly rent of $3.50 per square foot is needed to justify new office tower construction in OC.
Class A rents around John Wayne Airport now average $2.50 per square foot, with higher-end space now pushing past $3 per square foot.
By the time many of the towers are completed later next year and in 2008, rents could be higher than the $3.50 mark, observers said.
The total amount of office space under construction at the end of 2005 totaled about 1.2 million square feet. That’s almost double what was under construction a year earlier, said Jerry Holdner, vice president of market research for the Irvine office of Voit Commercial Brokerage LP.
Early 2006 saw even more projects in OC moving ahead. There was 4.4 million square feet of office construction under way at the end of the first quarter, according to Transwestern Commercial Services.
Five office towers have broken ground around John Wayne Airport this year, with several other projects on the way.
Industrial development, which has largely been an afterthought in OC the past several years, also is likely to see a boost.
Gardena-based developer Overton Moore Properties is moving ahead with plans for 830,000 square feet of industrial space in Seal Beach. Overton bought a 50.3-acre site from the real estate arm of Boeing Co. earlier this year.
That project alone would more than double the amount of industrial space being built in OC, which stood at 750,000 square feet at the end of 2005. More smaller-size projects also could be on the way in 2006, developers said.
The pace for land “conversion deals is slowing down, as the office and residential markets are not experiencing the same velocity as 2005. This is freeing up the market for new industrial projects,” said Robert Guthrie, president of No. 9 Costa Mesa-based Guthrie Development Co.
Smaller Projects Top List
Newport Beach-based Voit Development Co. notched the top spot on the list with 896,979 square feet of space completed last year. The company, a unit of Woodland Hills real estate brokerage Voit Co., was No. 3 a year earlier.
The bulk of Voit’s work was tied to completing the redevelopment of a former 37.5-acre Steelcase Inc. facility, now known as Tustin Gateway Business Park.
The 19-building, 500,000-square-foot industrial park fronts the Costa Mesa (55) Freeway. The buildings were all sold by the end of 2005.
No. 2 on the list was Irvine-based Centra Realty Corp., which completed about 520,000 square feet of development last year. Most of Centra’s development was around San Juan Capistrano.
The company, founded in 2000, lately has focused on for-sale and build-to-suit office projects. Industry watchers are keeping an eye on its plans for another type of project,the redevelopment of the former Nabisco plant in Buena Park.
Centra is looking to demolish the iconic plant and put up some 300,000 square feet of shops, though plans have been in flux for the past year.
Smaller, for-sale office and flex space dominated the list this year.
Companies such as No. 6 Bacchus Development Co., No. 7 BKM Development Co., No 10 Koll Co. and Guthrie continue to push forward with these types of projects.
Sales have been brisk for the properties, with tenants looking to own their own properties, rather than rent.
“It’s a special niche and it has shown strong growth here,” said Jeffrey John Bitetti, executive vice president for Bacchus, which is behind four office park developments in the Irvine Spectrum area.
Concerns about interest rate hikes, and its effect on the loan terms of smaller-office unit buyers have some wondering whether the pace of sales will soon see a slowdown. Bitetti said he doesn’t think developers need to be overly concerned.
“Over time, it’s not going to affect a buyer’s decision. A few basis points isn’t going to keep them from owning their own building,” Bitetti said.
