The timing for a turnaround in Orange County’s sluggish commercial development sector looks likely to vary from building type to building type—and from city to city—more than any time in recent memory.
After seeing less than 1.5 million square feet of office, industrial, retail and hotel development in 2009 and 2010 combined, plans have been announced for close to 2 million square feet of projects in the first half of this year.
Whether that’s a clear sign of a turning point for developers probably depends on their segment of the market.
With a few notable exceptions, the county’s office market—with vacancy rates still close to 20%—remains an unlikely source of speculative development for the next few years.
Likewise, the retail market has seen construction largely come to a halt since 2008, with few expectations for projects breaking ground this year or next.
Hotels in Works
A smattering of hotel projects is moving ahead. But that’s more a function of location than overall improvement in the market, according to local executives.
“It’s a street-corner business,” said hotel developer Bob Olson, chief executive of Irvine’s R.D. Olson Development, which has a 130-room project under way in San Juan Capistrano.
That’s the biggest hotel project moving ahead in the county right now. It’s also one of three hotel projects R.D. Olson has under construction, along with sites in Oceanside and Maui.
Two others projects, in Pasadena and Santa Barbara, could begin work later this year.
“We’re still being careful,” Olson said. “Patience is the key” in this market.
With office and retail largely on the shelf, apartments in South Orange County and industrial projects in North Orange County look set to account for the bulk of construction in the near term.
Apartments Hot
In Irvine alone, close to 4,000 apartments are in some stage of early work, or have gotten entitlements, according to city records.
Expect to see a fair share of those projects move ahead over the next year as local builders take advantage of demographic trends that have a growing list of institutional investors interested in apartments.
“We believe the apartment business is set to explode, with steadily rising rents and occupancy that will justify new construction,” said Lesley Deutch, vice president for Irvine-based John Burns Real Estate Consulting, in a market report that came out this month.
On a national basis, the consulting firm is predicting annual rent increases of 4.5% through 2015.
“Job recovery has been slower than expected, which is keeping unemployment high,” Deutch said in the report. “The uncertain environment is enough to convince consumers that renting is safer than taking on a mortgage.”
Besides apartments, the area’s industrial market seems likely to be the best candidate for development in the short term, thanks to low vacancy rates and a limited amount of options for larger tenants.
Larger North County industrial buildings now are about 96% full after a string of high-profile leases in the past six months, according to area brokers.
Panattoni’s Spec
In Anaheim, Sacramento’s Panattoni Development Co. is planning what was unthinkable a few years ago: a multibuilding, nearly 900,000-square-foot industrial project without having a single tenant lined up.
The project, on land formerly used by Boeing Co., would be the first speculative development of such size in Anaheim in nearly 10 years, according to brokers with the Anaheim office of CB Richard Ellis Group Inc. who have the project’s listing.
