Office Parks in Flux

Rexford Industrial Realty Inc. (NYSE: REXR), among the most active industrial investors in Southern California over the past several years, has paid $192 million for a trio of Central Orange County properties, in one of the largest commercial real estate acquisition pushes seen locally this year.

In a clear sign of the times as to what type of property the investor believes will provide the highest and best use going forward, the two largest local buys for Los Angeles-based Rexford—whose OC portfolio of industrial properties ran some 3.5 million square feet as of earlier this year—were for office campuses.

The nearly $8 billion-valued real estate investment trust doesn’t expect those two sites, in Santa Ana and Orange, to remain offices in the long term.

Instead, it said that the buildings will eventually make way for industrial development once long-term leases expire for the existing office tenants.

The deals serve as an indication of the lengths industrial developers will now go to find land for infill sites in OC, whose industrial market now counts a vacancy rate approaching just 2%, according to data from CBRE.

“There’s more industrial development going on in Orange County than there has been in several years, in large part due to industrial land value spiking dramatically over the past six to 12 months,” Patrick Schlehuber, executive vice president of investments at Rexford, told the Business Journal.

“Hence why it makes sense to convert outdated suburban office buildings into new industrial product.”

Behr Campus

The largest and most expensive of the three local Rexford deals is also the project whose timeline for an industrial conversion appears to be the longest.

Rexford paid $105.3 million for a nearly 370,000-square-foot office at 1801 E. St. Andrew Place in Santa Ana.

The office site, dubbed the Pacific Corporate Center, is on 21.3 acres, just west of the Costa Mesa (55) Freeway. It is currently home to one of Santa Ana’s largest employers: Behr Paint, a manufacturer and supplier of architectural paint and exterior wood care products.

Behr expanded into a 230,000-square-foot space at the campus in 2019, taking over from defunct telecom equipment maker Powerwave Technologies. That deal, struck in 2017, was among one of the largest office deals in OC the past few years.

The remainder of the building is leased to Deutsche Bank.

The deal works out to about $115 per land square foot, and $285 per square foot for the existing buildings.

Behr’s lease runs through November 2032, according to CoStar Group records.

Upon expiration of in-place leases, the company “intends to redevelop the site into modern, Class A logistics buildings,” Rexford said when announcing the deal.

There’s no indication that Behr, which has other facilities in the city, or Deutsche Bank plan to move prior to their leases concluding.

Rexford says the deal will still make money for it in the short run, noting an initial 5.6% unlevered cash yield, with a nearly 2.5% average contractual annual rent increase.

Volt in Flux

The second largest of the three local deals appears to provide Rexford some more flexibility for a near-term industrial conversion.

The REIT paid $70 million for a four-building collection of offices totaling about 191,000 square feet along North Glassell Street in Orange.

Known as the Volt Campus, the 12.5-acre site sits between the Costa Mesa and Orange (57) freeways, and has long been home to staffing services company Volt Information Sciences Inc. (NYSE: VOLT)

Volt previously owned the campus, but sold it in 2016 in a $35.9 million deal that included a long-term leaseback that was scheduled to run until 2031.

Orange-based Volt, valued at about $80 million as of early last week, now only uses a fraction of the site for its own operations as it has slimmed down its local operations and increased remote-working for its employees.

Officials with the tenant have indicated that they are more than willing to work with the new owner on a solution to get out of its lease.

“Our California headquarters just changed hands, literally just two weeks ago,” Chief Financial Officer Herb Mueller told analysts last month, during Volt’s latest earnings call. “We will be having discussions with the new owners.”

Rexford “specializes in industrial distribution centers and typically they are not in [office] real estate. So, we are certainly going to pursue [exiting the lease]. If they decide they want to hold for a long period of time, then we are working at a Plan B [which] would be to sublet the space,” Mueller said.

Rexford, for its part, said the initial unlevered cash yield is projected at 4.9%, with contractual annual rent increases of 3.0%.

As with the Santa Ana campus, Rexford said it intends to redevelop the Volt property in Orange upon expiration of the in-place lease by constructing new Class A industrial buildings.

Specifics on the scale of either the Santa Ana or Orange conversion projects haven’t been disclosed yet.

96K SF in Orange

Plans are clearer for Rexford’s third recent deal in OC, for a vacant 4-acre industrial site in Orange.

Rexford paid $16.7 million, or $96 per land square foot, for the parcel at 2390-2444 N. American Way, which is about half a mile from the Volt campus.

Rexford said will soon start construction work on the site, with plans to deliver two industrial buildings totaling 96,100 square feet in the first half of 2023.

“We will develop them as generic industrial warehouses; given the size, it’s expected that someone in the neighborhood with a small business will want to lease this,” said Schlehuber, adding that there are very few 50,000-square-foot industrial properties available in OC.

“We want to deliver a product to the market that’s desperately needed.”

Conversion Game 

The two OC office sites are currently zoned for industrial, easing the development process for Rexford.

“Both are Class B suburban offices in industrially zoned neighborhoods with not a lot of amenities nearby,” which has lowered the value of the assets, especially in the wake of coronavirus with employers often struggling to bring employees back to the office, Schlehuber said.

“The employees that do want to return have  a modern office with plenty of amenities,” he added.

Trend Gaining Steam

Industrial developers in OC are turning to underutilized office and retail sites as sources of new development opportunities, with available land shrinking as demand continues to accelerate.

Rexford has been working on deals like the this elsewhere in California, with office redevelopment plans also underway in Los Angeles and San Diego.

In OC, Rexford’s move follows a similar one in Lake Forest announced earlier this year, with two developers heading the construction of new industrial buildings in and around the city’s Pacific Commercentre office park.

The planned redevelopment will replace some of the former office campus of Panasonic Avionics with new industrial facilities totaling nearly 380,000 square feet.

Newport Beach-based industrial developer Western Realco is heading one portion of the roughly 22-acre project, while an affiliate of Denver-based Black Creek Group would handle the redevelopment of the site that holds the largest office last used by Panasonic, a nearly 145,000-square-foot office and R&D; building at 26200 Enterprise.

“I think it will be common to see these types of conversions moving forward,” Schlehuber said.