There are signs that some of the zombie buildings of Central Orange County’s high-end office market are about to come back to life.
Central OC’s office market totals some 15 million square feet of space in Anaheim and Orange. The vacancy rate currently is about 18%, largely in line with the county’s overall office market.
But for the buildings considered to be the cream of the crop of the central area, vacancies have spiked during the past year, outpacing the market as a whole, local brokers note.
Among the half-dozen or so of the largest high-end buildings in the area—a group that combines for roughly 2 million square feet—vacancies now run close to 30%, according to brokers familiar with the market.
The higher-than-average vacancy rate isn’t due to a lack of interest among tenants. There’s close to a dozen companies looking for space in the 40,000-square-foot range or higher, according to brokers.
“It’s an active market right now,” said Robert Caudill, director of the office specialty group at Colliers International’s Irvine office.
Vacancies have risen in part because a number of those buildings are in, or have just emerged from, some form of financial distress.
Long Slogs
The distress has, in many cases, made for a long slog when it comes to negotiating with financially troubled owners or their lenders.
“Deals haven’t been easy with all the zombie buildings in the area,” said David Giglio, an office broker and associate vice president for the Orange office of Grubb & Ellis Co.
“It’s been a challenge to get some class A deals through,” said Caudill.
Most of the zombie buildings face the same challenges: nearly all of the top-end buildings in the area were bought near the peak of the local commercial real estate market, just as one of the region’s main sources of employment—the subprime mortgage industry—began to collapse and shed jobs.
Some recently sold buildings continue to have an effect on the market.
The City Plaza Tower and City Parkway complexes in Orange got out of distress when they changed hands at a discount in 2008 and 2009. The bargain price allowed new ownership to drop rents, making it even tougher for buildings still in distress to compete.
There’s light at the end of the tunnel for the area.
One complex recently has traded hands, while two other buildings have been placed under court-overseen receivership, with a third expected shortly.
Late last year, an investment offshoot of Los Angeles-based brokerage CB Richard Ellis Group Inc. bought Orange City Square, a four-building office complex off the Garden Grove (22) Freeway.
The 386,000-square-foot property is estimated to have traded hands in the $65 million range—roughly half the price it fetched near the peak of the market.
The building had seen occupancy rates drop from about 80% to 60% during the past three years. The owners now are listing monthly rents of about $2.10 per square foot at the complex, according to CoStar Group Inc.
Go-Ahead on Towers
More recently, a court-appointed receiver gave brokers the go-ahead on marketing a pair of buildings in the area previously owned and operated by Maguire Properties Inc., now known as MPG Office Trust Inc.
Colliers’ Caudill has the listings for the two properties: Stadium Towers, a 262,360-square-foot office at 2400 E. Katella Ave. next to Angel Stadium of Anaheim; and 500 Orange Tower, a 14-story, 280,340-square-foot building a few blocks away in Orange, on North State College Boulevard.
Maguire defaulted on loans tied to Stadium Towers in mid-2009, and on 500 Orange Tower in early 2010. Sherry Bower, a managing director with CB Richard Ellis Group, was appointed as the receiver for the properties a few months ago, according to court records.
The buildings had a combined $210 million of debt tied to them, according to regulatory filings.
Once a property goes into receivership, it typically takes about two or three months for the new property managers to get a good understanding of its operations and start pursuing any new lease deals, according to Caudill.
Stadium Towers and Orange Tower have just reached that point.
“We’re getting the message out now, that these buildings are ready to do deals,” Caudill said.
Monthly rents of about $2.10 per square foot are being offered at both buildings, which is down from the $2.25 rates being offered by MPG.
Landlords’ monthly asking rents for class A space in Central County in general now run about $2 per square foot, according to brokerage data.
Beyond asking rents, timing still can be an issue.
Deals that could once be made in 30 to 45 days, could now take 60 to 90 days to complete if lender approval is required, said Grubb’s Giglio.
Patience Required
The question now in Central County is whether tenants–and the brokers who represent them––have the patience to wait that long, he said.
“I’m optimistic that once receivers are put in place, that things can happen,” Giglio said.
“If you can hold your nose, and deal with a rigid set of parameters, then you should be able to make a deal (with a building being operated under receivership),” said Randall Parker, president of Newport Beach-based tenant brokerage Travers Realty Corp.
“The issue is if you have any special requirements—if that’s the case, then it probably won’t work,” Parker said.
Another distressed, high-end office in Orange once run by Maguire, the City Tower building, should be the next building to go into receivership, according to market watchers.
The 21-story, 410,000-square-foot building—which along with Stadium Towers and Orange Tower is the only remaining distressed asset of MPG in the Central County area—has about $140 million of debt tied to it.
MPG defaulted on loans tied to City Tower, located at 333 City Blvd. West, last September. It’s now being run by a special servicer.
Travers’ Parker said he has a client looking to lease about 10,000 square feet at the City Tower building, which counted a 78% occupancy rate at the end of 2010.
A proposal has been sitting with the special servicer’s representatives since December, he said.
“Right now, we’re out in the cold,” Parker said.
