Developers are taking a much more varied approach to projects planned for Orange County’s office market next year than during the area’s last building boom.
Construction could start next year on six major office projects totaling nearly 2.5 million square feet in Irvine and Tustin, based on data from local developers and brokerages.
A bulk of the projects are planned as spec buildings. A few other large projects, including sites in Anaheim and Santa Ana, could also proceed if market conditions continue to trend upward for landlords and preleasing activity picks up.
The amount of new office activity now planned in Orange County is the most in more than seven years. The last time, about 2 million square feet of for-lease office space, largely comprised of high-rise towers, was under way.
Design
A differentiating factor between the latest batch of proposed offices and those in prior boom markets—besides their size and scope—is the offices’ design.
Their developers are promising some of the most unique designs the area’s ever seen by incorporating a variety of creative-office features, cutting-edge architecture styles, and workplace amenities that were largely missing the last time around, when the market gained a series of high-rises that were distinguished in large part by their locations and owners.
“We’re trying to build something new that (the area) hasn’t seen before,” said Kevin Hayes, executive vice president for the Irvine office of Lincoln Property Co.
“We think the demand is there” in terms of tenants seeking new types of office space, said Hayes, whose Dallas-based company is working with the city of Tustin to finalize plans for a multibuilding creative-office development near the blimp hangars at the city’s former Marine base.
Thomas Bak, senior managing director for Dallas-based Trammell Crow Co.’s Southern California operations, echoed Hayes’ sentiments.
“We’re trying to bring something else to the market,” he said of his company’s plans for Boardwalk, a speculative project near John Wayne Airport that will get under way early next year.
Developers have a reason for optimism right now, according to Kurt Strasmann, senior managing director in Orange County for brokerage CBRE Group Inc.
“It’s an exciting time right now. The market is really strong right now.”
OC’s office market vacancy rates stand at about 9.6%, for a region whose building space totals a little more than 100 million square feet, according to CBRE data.
Office developers typically aim to deliver new buildings into a market where vacancy rates are in the single digits.
Other positive signs in the market are 10.4% year-over-year rent growth and 3.3% year-over-year job growth, according to Bak.
“We’re very bullish on the Orange County market,” he said.
Some submarkets are well under the 10% threshold desired for new construction.
The Irvine Spectrum area’s dominant landlord—Newport Beach-based Irvine Company—says its buildings in the area are more than 95% leased.
That’s prompted the developer to push hard for new construction there. It already has one office tower close to completion: 200 Spectrum Center, a 21-story building that will be the county’s tallest office when it opens early next year.
Irvine Co. executives told the Business Journal in August that work could start on a sister tower next year, assuming leasing activity at the first tower proves strong—a few area tenants are considering the 425,000-square-foot building for large deals, according to real estate sources.
Irvine Co. is also looking to build a pair of office projects in the Spectrum that cater to tenants seeking low-rise space. It plans to build six low-rise buildings on land it owns about a mile from the Spectrum shopping center on Sand Canyon Avenue.
The offices will be at the company’s Discovery Business Center and Sand Canyon Business Center campuses and total about 529,000 square feet.
The six buildings, which Irvine Co. calls “Next Gen Campus” offices, will include a variety of new design features and workplace amenities that are increasingly in demand by top tenants, the developer said.
The biggest difference in Irvine Co.’s projects in terms of design and appearance this time around is its focus on glass rather than the travertine stone preferred for prior developments.
Its marketing materials for 200 Spectrum Center describe the new look as incorporating “linen-finish stainless steel and high-performance floor-to-ceiling Viracon Glass for energy efficiency and maximum daylighting.”
The glass-heavy focus isn’t coming cheap.
Skyscraper and office glass prices are going through the roof, and the products themselves are taking a long time to acquire. That’s due to increased demand by developers across the county in the burgeoning real estate construction sector, combined with a lack of manufacturers.
Prices for the glass are up more than 30% in the past 18 months, according to a recent report in the Wall Street Journal. The cost increases, plus price hikes for other materials, mean that for taller buildings such as 200 Spectrum, construction costs could now approach $600 per square foot, local real estate sources estimate.
“We’re concerned,” said Trammell Crow’s Bak, whose own project will include floor-to-ceiling glass. “We’ve gone ahead and ordered the long-lead items (like the glass). We feel that’s the best way to mitigate those issues.”
Rising construction costs shouldn’t keep Irvine Co. from proceeding. Company owner and Chairman Donald Bren is Southern California’s wealthiest person, with a fortune estimated to be in excess of $15 billion.
Irvine Co.’s two new low-rise projects in the Spectrum should break ground early next year and be finished by 2017, Doug Holte, its office division president, said in August.
The developer’s strong financial position can allow it to build when others might hesitate, he said.
“We’ll be delivering these (buildings) a little ahead of the market.”
Tustin Taking Flight
Projects by Lincoln Properties and Trammell Crow are also scheduled to break ground early next year and could be followed in a year by an airport-area development by Houston-based Hines Interests LP.
Lincoln Properties is preparing to build what will be the county’s first ground-up creative office campus at the Tustin Legacy development at the city’s former Marine base.
The project, previously called Cornerstone and now called Flight at Tustin Legacy, will include a number of four-story office buildings and total about 523,000 square feet.
Rough grading will begin by March, with the first couple of buildings largely completed by the end of the year, according to Hayes.
“We’re definitely going on spec,” said Hayes, whose company has partnered with Boston-based real estate private equity firm Alcion Ventures LP to finance the project.
Its office component, which will also include a market hall-type retail building and other amenities, should largely be built and ready for tenant improvement work by mid-2017, he said.
Also on the fast track is Trammell Crow’s Boardwalk project about a half-mile south of the San Diego (405) Freeway on Jamboree Road.
The 545,000-square-foot office project will include two nine-story towers connected on alternating floors with indoor bridges and outdoor walkways.
The layout of the bridges will allow up to 65,000 square feet of contiguous space on a single floor—something rare for an Orange County office, Bak said.
Interest
The developer said it’s gotten serious interest from tenants wanting to lease about 500,000 square feet there but that it has so far held off on signing any deals.
That’s largely due to the recent fast pace of rental increases in the local market and forecasts of more of the same in upcoming years. Figuring out where rents will be when the offices are finished is a challenge, Bak said. “The market is moving so quickly.”
Technology, healthcare, and legal tenants are among some of the more likely occupants of the airport-area buildings, according to the developer.
Technology tenants, more than any other, are driving much of the growth in the local office market, according to CBRE’s Strasmann. Tech firms were involved in about 20% of the area’s 50 biggest leases four years ago, he said. This year, more than 40% of the top deals involve such firms.
“The technology sector has really ramped up, and we’ll continue to see more” tech deals.
