The industrial market around John Wayne Airport has long been one of Orange County’s strongest. Most brokerage figures put the va-cancy rate for the area at about 5%.
But that doesn’t seem to be the case on Von Karman Avenue.
The heavily traveled road, long one of the hubs of business for Irvine manufacturers, has more for-lease and for-sale signs lining it now than at any time in recent memory, according to local market watchers.
By the Business Journal’s count, there’s about 1.5 million square feet of empty industrial space lining a roughly 2-mile stretch of
Von Karman, running southwest from the edge of the District at Tustin Legacy shopping center toward the airport.
That’s nearly the same amount of total vacant industrial space most area brokerages list for all of Irvine’s airport area,let alone one street in the city.
Brokerages’ vacancy data does not include redeveloped buildings being marketed for sale, or empty industrial buildings that were slated for condominium development during the housing boom a few years ago. Von Karman counts both of those building types among its empty space.
Partially or totally vacant buildings can be seen on nearly every block, ranging from football-field sized warehouse and distribution facilities to smaller, multitenant buildings that mix industrial and office uses.
Landlords’ woes aren’t confined to Von Karman. At least another 500,000 square feet of industrial space is advertised as available for lease on nearby streets that run along Von Karman in the same area.
Much of the vacant space in the area was acquired near the peak of the market in 2006 and 2007. There are no reports of any of those landlords or developers having trouble with their lenders.
The area’s expected to bounce back once leasing activity begins picking up again, due in large part to Von Karman’s high-profile location, said Trent Walker, senior vice president for the Irvine office of Voit Commercial Brokerage.
“Over the years, there’s always been activity here,” Walker said.
Prime Example
In the meantime, Von Karman is just one of the more glaring examples of the slowdown in the local industrial market.
“There’s been an acceleration of large buildings hitting the market,” both in Irvine and elsewhere in OC, said Jeff Cannon, corporate managing director for the Irvine office of tenant brokerage Studley Inc.
For buildings 100,000 square feet or larger, “the supply has more than doubled in the past 12 to 15 months,” Cannon said.
Figures should soon start reflecting the increased inventory in the area. By the third quarter of this year, brokers expect to see the reported vacancy rate in the airport area move into double digits, according to John Griffin, senior vice president in Voit’s Irvine office.
While vacancy rates have largely held up in recent quarters, leasing activity has been lagging across much of the county. Sales and leasing activity in the last quarter of 2008 totaled 2.8 million square feet for OC, down 18% from the prior year, according to data from Colliers International.
“The supply side doesn’t look that bad, but there’s no demand (right now). There are few companies that are expanding,” said Griffin, who is marketing two big properties on Von Karman.
One of those properties is a 260,000-square-foot building at 2323 Main St., on the corner of Von Karman. The high-profile building sits across the street from the former Washington Mutual Inc. office campus, which has its own vacancy issues.
Developer Hines Interests LP of Houston and Newport Beach-based real estate investment bank Buchanan Street Partners paid a reported $31.5 million for the Main Street building in late 2006.
The building formerly housed American Sporting Goods Inc., but has been empty since the shoe company relocated its headquarters to Aliso Viejo.
Hines’ plan for 2323 Main Street had been to upgrade the building, which includes some office space, but keep it as a commercial property. Its previous owners wanted to build nearly 450 condos there, but faced resistance from other local businesses.
A few blocks down the street, Los Angeles-based Kilroy Realty Corp. still appears to have plans for a condo conversion. Its 157,000-square-foot building had housed Hughes but has been empty for nearly two years.
The office landlord said in its most recent earnings report that it’s still working to re-entitle the land for housing, although the property still has a for-lease sign.
Kilroy might try to land a short-term industrial lease for the building until the housing market recovers, brokers said.
Irvine Commerce Center
Corona del Mar-based Advent Group Inc. went ahead with its own redevelopment of a nearby industrial building, at 17352 Von Karman. But it opted to keep the building as a commercial property. The developer just finished up construction there for a new for-sale property.
Called Irvine Commerce Center, the 95,000-square-foot building is targeting smaller office and industrial companies looking to buy space as small as 3,000 to 4,000 square feet, although the project can hold larger tenants as well.
Prices run about $395 per square foot for office space and $278 per square foot for industrial space, according to marketing material.
Considering the state of the economy, the new development “couldn’t have hit the market at a worse time,” said Don Nourse, senior vice president for CB Richard Ellis Group Inc., who is marketing the project.
Still, the developer is hopeful that new small business lending programs and the project’s environmentally friendly design might help bring buyers to the table, Nourse said.
The amount of vacancy on Von Karman doesn’t faze Nourse, especially since most of the other buildings in the area are for lease.
Signs advertising empty space “come and go,” he said.
Voit’s Walker has the largest listing on Von Karman, at a project known as Irvine Crossings. Newport Beach’s Voit Real Estate Services and Buchanan Street paid $57 million for the 428,000-square-foot building in late 2007, the year’s largest industrial buy.
Missouri-based technology service pro-vider Savvis Inc. has been leasing 126,000 square feet of the property as a data center. The rent from that lease covers the payments due for the entire property, Walker said, so the owners aren’t fretting too much about leasing up the remaining 303,000 square feet, which remains empty. Smith Tool Co. previously leased the property.
Once potential tenants regain confidence in the market, big buildings such as Irvine Crossings will be hot commodities, Walker said.
The base of OC industrial buildings larger than 100,000 square feet has declined by 15% in the past decade as properties have been torn down to make way for offices, condos and other uses, said Walker.
There are 403 industrial buildings in OC larger than 100,000 square feet and just 54 buildings bigger than 300,000 square feet, according to Voit data.
The good news from the increased vacancy is that after years of being squeezed for space, large OC industrial tenants have more local options than at any time in recent memory, said Studley’s Cannon.
Local manufacturers that in recent years have opted for the Inland Empire or Corona, due to their larger base of big buildings, could be tempted back to OC by the increased space available, he said.
