Sam Zell’s Equity Office Properties Trust is talking to developers and potential tenants about building up to 750,000 square feet in Orange County.
“We’ve had a very good experience in Orange County,” said Zell from Equity Office’s headquarters in Chicago last week. “We have a lot of confidence in that market and it’s one of the great places to be compared to other areas of the country.”
Zell, who once described himself as the “grave dancer” of real estate wheelers and dealers, is well-known for his ability to takeover and turnaround distressed properties.
But now the chairman of Equity Office Properties is getting closer to actually developing commercial projects.
In San Francisco, Atlanta, Bellevue, Wash.; and Newton, Mass., Zell’s lieutenants have been working with outside companies on ground-up construction projects.
“In each of those cases, there is a third-party developer,” said Zell. “We continue to follow the same strategy we outlined from the start, which is to acquire buildings and let the developers take the risk.”
With a portfolio of some 80 million square feet of space across the U.S., Equity Office executives say they want to take advantage of strong real estate markets by becoming more involved with new development. Working through a third party is a way other real estate investment firms have leveraged land holdings to gain a larger share of profits from new development.
Zell said besides considering Orange County, the country’s largest office REIT also would be open to working with third-party development projects in Los Angeles.
“If the right opportunity would become available in that market and it made sense, we certainly would look at it,” he said.
Equity Office believes it might already have identified a potentially lucrative piece of real estate to stage a development project in Orange County. And it’s property already under the company’s corporate flag: 8.25 acres of undeveloped land next to its 500 Orange Tower at North State College Boulevard and Orangewood Avenue.
“We’ve had it for years but we were waiting for lease rates and (land) values to increase enough to do something,” said Peter Adams, senior vice president for Equity Office in Los Angeles.
The parcel was included as part of a $27 million package Equity Office purchased from Koll Development in 1994.
Besides the vacant land, the deal included a 14-story office tower, a restaurant and Hilton Suites hotel. Equity Office figures it paid about $93 a square foot for the plaza site.
“They always seem to have very good timing,” said Rick Warner, senior vice president of CB Richard Ellis in Anaheim. “They were the first buyer in central county of any high-quality product when the economy was down in the early ’90s. They bought at a very good price, way below replacement costs.”
The veteran commercial broker added that Equity Office’s 500 Orange Tower as well as Executive Tower by MainPlace Mall,which it also bought during the last recession for about $80 a square foot,are both worth around $200 a square foot now.
“Both were unbelievable deals,” said Warner.
For now, Equity Office says it is concentrating on plans that could lead to building new offices near 500 Orange Tower. But it also has entitlements in place for a twin to Executive Tower.
At 500 Orange Tower, Equity Office has entitlements for another 1 million square feet of office space.
“We probably wouldn’t build that much,” said Equity Office’s Adams. “But if the first one goes well, our plans would be to build a second building on the property.
The company prefers to work on both plans at once. “(But) we don’t want to put too much speculative space on the market at any one time,” said Adams. “Our game plan would be to be prepared to do it if the opportunity presented itself.”
The company has been preparing site plans and has had preliminary architecture work done on building a new 300,000-square-foot, mid-rise office complex. The building, which early estimates put at almost $67 million to complete, would probably be six to eight stories.
Equity plans to continue to develop more detailed architecture in coming months, according to Adams.
“We are in discussions with potential anchor tenants right now,” he said. “Depending on how that goes, we would probably start building within nine months. Our hope would be that by the end of the year, we’ll have at least something started.”
At 500 Orange Tower, Equity Office is asking around $2.15 a square foot. The building, which is more than 90% occupied, was built in 1988. A new office complex opening in early 2002 probably could be leased for at least $2.25 a square foot, according to Adams.
Raymond Torto, managing director of Torto Wheaton Research in Boston, has tracked Zell’s real estate activities across the country. The well-known commercial market analyst says he isn’t surprised to see Equity Office looking at Orange County to increase its move to become more closely aligned with project development.
“I’m sure, given the rental rates being asked now, when they penciled out the deal, it was profitable,” said Torto. “My guess is that they wished they had started working on this earlier.” n
