Orange County developers are taking varied approaches to speculative office developments in the improving local economy, including a cautious approach on ground-up projects.
How long the conservative strategy will last, if the area’s office market continues to pick up steam, remains to be seen.
Numerous projects have been proposed across the county, though there’s only one major ground-up office development under way that doesn’t already have a dedicated major tenant: a 21-story tower being built next to the Irvine Spectrum shopping center.
The tower, known as 200 Spectrum, is scheduled to open in about a year. It will total about 425,000 square feet, making it the largest and tallest building in the immediate vicinity of the Spectrum.
The project’s developer, Newport Beach-based Irvine Company, has a similarly sized office tower on the books a short distance away in the 400 block of Spectrum Center Drive. A time frame for that project hasn’t been disclosed.
Real estate sources said Irvine Co. is waiting to break ground on it until it gets a fair amount of leasing for 200 Spectrum Center. No leases have been announced at the first building, which will feature large glass windows and prominent steel window frames, a marked shift from the stone-clad towers in the area.
Irvine Co.’s apparent caution for starting the second Spectrum tower contrasts with the landlord’s last office building spree in that market. It built a pair of towers—the 20 and 40 Pacifica buildings—at the same time, with the first finished in 2007, just before the country’s real estate market imploded.
Four towers in the market around John Wayne Airport, including a 10-story building built by Irvine Co. at its Irvine Towers office complex, were also largely completed about a year before the recession.
They added more than 1.5 million square feet to an office market that was about to feel the effects of the mortgage industry’s plummet, which accounted for big chunks of empty space throughout OC.
It’s taken nearly eight years, but the area’s office market has finally returned to a point comparable to where it was prior to the downturn, which brought vacancy rates approaching 20%.
Vacancy rates now sit between 10% and 13%, based on a sampling of data from area brokerages.
Developers tend to avoid speculative development until they think they can deliver a building into a market with vacancy rates near 10% or lower. It’s a clear sign of optimism about the state of the local economy when they do proceed with a speculative project.
Developers’ optimism appears to be increasing, but it’s still guarded. There is still a decent amount of vacant space in some of the area’s high-end buildings that might be keeping other developers from pulling the trigger on projects, notes a recent report by the Irvine office of tenant brokerage Savills Studley Inc.
Class A offices still have a 17.3% availability rate, well above the local market’s 10.5% prerecession low in the fourth quarter of 2005, according to a report last month by Savills Studley Executive Vice President Royce Sharf.
Such offices could drop to that low availability level by the end of next year if the current absorption pace continues.
A good portion of the vacant high-end space is at Irvine Co.’s 520 Newport Center tower, a speculative office in Newport Beach that opened late last year. Leases have been announced for just a few floors at the 21-story trophy building, where space isn’t going cheap. Some of the monthly rents signed so far exceeded the $5-per-square-foot mark, among the highest in the county, according to Savills Studley.
Early notable tenants include Stifel Nicolaus & Co., Acacia Research Corp., and Janus Capital Group Inc.—now home to Pacific Investment Management Co. cofounder Bill Gross.
Rents of about $3 per square foot are typically needed to justify the cost of constructing a building here. Average monthly class A building rents in OC are now about $2.25 per square foot.
Low-Rise Plans
If more speculative office development projects get under way, it’s unlikely all will be of the office tower variety.
The city of Tustin is planning its own speculative office project at its Tustin Legacy development that would target users of low-rise creative-office space. It is close to a deal with the Southern California offices of Lincoln Property Co. for the company to take over development of a 37-acre creative-office project called Cornerstone.
The proposed campus near the southwestern edge of the 820-acre Tustin Legacy could total nearly 860,000 square feet at buildout.
An initial office development phase could encompass 400,000 square feet and would be geared toward speculative development, according to John Buchanan, deputy director of economic development for the city.
An improving office market and lack of similar creative-office buildings in the market is prompting the switch to speculative development, Buchanan told the Business Journal last month.
“Now is the time. There’s a demand for unique product like this.”
Campus buildings would “address the 21st-century work environment” and feature a “contemporary, modern and sustainable” design character, according to city plans previously filed for Cornerstone.
Lincoln Property, a Dallas-based real estate investor and developer with local offices in Santa Ana, is no stranger to creative-office projects in the area. It’s working with Seligman & Associates Inc. to convert about 300,000 square feet at the Southfield, Mich.-based landlord’s Anaheim Corporate Office Plaza into a high-end creative-office campus called Axis.
The five-building park across the street from Angel Stadium will get a nearly $10 million renovation and could also include a restaurant or bar, Lincoln Property said.
Renovations of buildings into creative-office space, as opposed to ground-up development, offer speculative developers one big advantage: speed, said Bill Halford, chief executive of Irvine-based Bixby Land Co.
“The pent-up demand for highly amenitized workplaces in Orange County won’t be met in the near term by ground-up development,” said Halford, whose company is among the biggest creative-office developers in the state.
In other words: New construction will take too long to meet needs in a market that has little creative-office space.
The company’s latest fast-tracked speculative renovation project is in the Irvine Spectrum. It closed on the $44.3 million buy of Kawasaki Motors Corp. U.S.A.’s Irvine headquarters last month, its largest purchase in OC in several years.
A $20 million redesign of the 262,463-square-foot building will take place after Kawasaki vacates the building in about a year, Bixby said.
That’s a much quicker process than starting a ground-up project from scratch, said Halford, who’s been able to bring to the OC market other newly renovated projects for lease within a year of buying the properties.
“We think this strategy is the quickest way to bring these projects to market,” Halford said at the time of the Kawasaki building acquisition.
