Ground-up development in Orange County’s office market has been largely nonexistent the past three-and-a-half years, but there’s been plenty of growth of another kind—making existing buildings here more energy efficient.
OC’s “green office market”—for-lease buildings that conform to a variety of environmentally friendly building standards—now totals about 6.5 million square feet, according to a second-quarter market report from Newmark Knight Frank.
That’s about 7% of the region’s core office market, according to the New York-based brokerage’s data.
On a square-foot basis, it’s also nearly the same amount of OC office space built in 2007, the peak year for office construction during the last development boom.
At least 5 million square feet of the area’s green buildings have been retrofitted to be environmentally friendly since the end of 2007, providing a steady source of business to contractors, property managers, consultants and others.
Big Participant
Some of the area’s largest property owners have helped foster the trend.
Newport Beach-based Irvine Company, OC’s largest landlord, began in late 2008 to get Energy Star ratings under a program created by the U.S. Environmental Protection Agency that calls for reduced energy consumption and greenhouse gas emissions.
Irvine Co. said it now has the ratings for about 95% of the high-rise offices in its portfolio.
Energy Star buildings use 40% less energy on average than typical office buildings nationwide and release 35% less carbon dioxide into the atmosphere, according to regulators.
Irvine Co. said it now is working to earn the same certifications for its low-rise office buildings.
Other landlords are going a different—and likely more expensive—route by seeking the more-prestigious Leadership in Energy and Environmental Design (LEED) certification from the U.S. Green Building Council.
There now are about 25 local projects that have LEED certification, according to the website for the group’s OC chapter.
LEED-certified buildings include Costa Mesa’s Plaza Tower, Center Tower and Park Tower, all run by locally based C.J. Segerstrom & Sons.
The 2211 Michelson tower in Irvine also has earned the label, and so has the University Research Park office that holds the headquarters of architecture firm LPA Inc., among other Irvine Co.-owned buildings.
Another 125 or so projects are registered with the building council as being LEED-quality but have yet to get the agency’s full certification.
Recent local additions to the green office market include the Bayview Corporate Center at 3501 Jamboree Road in Newport Beach.
The two-building, 330,000-square-foot complex—former headquarters of now-defunct savings and loan operator Downey Financial Corp.—was built in 1988. It was just registered for LEED certification for upgrades it recently made under new owner SK Hart Properties.
It’s not cheap going green.
It typically will cost anywhere from 20 cents per square foot to 50 cents per square foot to retrofit an existing office building to LEED standards, according to industry data. Money can be spent on energy-efficient roofs, water systems and recycling programs, among other changes.
Steven Core, chief operating officer for Newport Beach-based property management firm RiverRock Real Estate Group Inc., said he’s seen owners spend upward of $100,000 getting office buildings of about 200,000 square feet certified green.
Another owner of an older, 50,000-square-foot building ended up abandoning a quest for LEED certification after being told the costs could end up topping $3 million, Core said.
2% More
For new construction projects, such as the 2211 Michelson tower, which opened in mid-2007, developers have reported that green features could end up costing it an extra 2% in costs.
Early adopters of retrofitting have reported earning back their investment on an average of about 18 months, according to some estimates.
Is it worth it?
Probably—although not as much now as during a healthier office market, say industry watchers.
“All other things being equal, a tenant will typically choose a green building,” Core said. “But for right now, it’s still the bottom line that (tenants) are looking at.”
Area buildings built or retrofitted to environmentally friendly standards are seeing a boost in occupancy and lease rates compared to other offices, based on a reading of Newmark Knight’s latest quarterly data.
Green buildings had a vacancy rate of 16.4% at the end of the second quarter, according to Newmark Knight.
That’s down from the 17% at the end of the first quarter and 20% a year ago.
OC’s total office market had an 18.6% vacancy rate at the end of the second quarter, down from 20.4% a year ago, according to Newmark Knight’s data.
Among green offices, there was 40,521 square feet of positive absorption last quarter, the fifth consecutive quarter of progress by that measure.
Rents for green offices in the county ended the second quarter with an average monthly asking rate of $2.20 per square foot compared to $1.94 per square foot for the market at large.
High-End Trend
Many of the OC offices that are considered green were already seen as the area’s most prestigious buildings, so the price difference in rents and vacancy levels with the rest of the market doesn’t necessarily come down to an office being green alone, industry watchers said.
“We haven’t seen many building owners capture a price premium” because of green certification, Core said.
While 26 cents higher, rents for green offices—like other area buildings—still are seeing the effects of a market that favors tenants in negotiations.
Asking Less
Asking rents for green offices are down 3.4% from year-ago levels, and the current average asking rent of $2.20 per square foot was the lowest figure since the third quarter of 2004, according to Newmark Knight.
Among other regions in California, Los Angeles counts about 31.6 million square feet of space in green buildings, which is roughly 6% of its total office market. L.A.’s green buildings have a 17.1% vacancy rate, and monthly rents average about $2.85 per square foot.
San Francisco’s green office market is about 29 million square feet—more than half of that market’s total downtown office inventory. Its green buildings count a 13.1% vacancy rate and have monthly rents of about $3.10 per square foot, Newmark Knight reports.
