County Building Up to Office Glut : High-Rise Construction Boom May Lead to Oversupply

Throughout Orange County, steel and granite structures stretch toward the sky to the jarring rhythm of jackhammers, drills and saws.

Thriving home-grown service and high-technology companies, hungry for more space and fancier offices, impatiently tap their toes. Developers, eager to get on with projects postponed during the recession years of 1981 and ‘82, have found willing dance partners in lenders whose interest rates have been lowered with the recovery.

Amid all the office tower construction, the predictions of an office space glut can barely be heard.

Orange County’s current office vacancy rate is the lowest it’s been in four years, according to a new report by Grubb & Ellis Commercial Brokerage Group. But in the next year to 18 months, the building boom should catch up with demand, and once again, landlords may find themselves offering free rent and other concessions to lure tenants.

“In 1985 there will be considerable concessions” from landlords to tenants, predicted Susan Meyer, director of research for Grubb & Ellis Commercial Brokerage Group, who anticipates an “oversupply” of office buildings.

Others in the commercial brokerage industry hesitated to predict troubles in 1985. They said they are waiting to see whether the economy, rebounding from a recession, will generate sufficient tenant demand for the new space. “1985 will be the telltale year,” said Robert M. Trinen of Frost Trinen Partners in Costa Mesa.

During the next 18 months, Meyer of Grubb & Ellis said, 19 new office buildings, 6 stories or higher and containing 5 million square feet of leasable space, are scheduled to open in Orange County, which will increase the county’s total number of high-rise buildings by 48%. Fifteen of those buildings, she added, will rise in what she calls the Greater Airport Area, more specifically in either the Irvine Industrial Complex near John Wayne Airport or in the newly named South Coast Metro urban core near Costa Mesa’s South Coast Plaza.

Some of the key projects under way:

Jamboree Center, Irvine. The Irvine Co. is developing two, 12-story buildings, next to a new Hilton hotel, which are scheduled for completion next December.

Koll Center, Irvine. Newport Beach-based Koll Co. is building a 12-story office tower, scheduled to open in October; an 11-story building to open in December; and another 11-story building, to open in September.

Center Tower, next to Orange County Performing Arts Center near South Coast Plaza in Costa Mesa. The 21-story structure under construction by C.J. Segerstrom & Sons will become the largest office building in the county.

Hutton Center, in Santa Ana, a nine-story building to open in April. It is being developed by Hutton Associates of Costa Mesa.

South Coast Metro Center, Costa Mesa. A 12-story building will be completed next month. It will be joined by another 12-story twin tower opening in the third quarter of ’85. The project is being built by Torrance-based Transpacific Development Co.

The new Grubb & Ellis study shows that at the end of 1984, the office vacancy rate in Orange County dropped to about 14%, the lowest in four years, following a year of record leasing. As a result of declining vacancies, marketing come-ons such as free rent for the first six months of five-year leases, a common negotiating tool used by landlords during the recession, have become far less prevalent.

But the relief that landlords are experiencing will be short-lived, said Meyer, who predicts that later this year vacancy rates in the county will climb to about 18% or 19%, despite an anticipated continued record demand for business rental space in the county.

“There is approximately a 2 1/2- to 3-year supply of office space either vacant or under construction in Orange County,” said the Grubb & Ellis study, which analyzed approximately 70% of the county’s existing supply of office space, totaling about 28 million square feet, as well as plans for new office buildings. Normally, Meyer said, a year’s supply of office space is indicative of a healthy market.

The many multistory office buildings currently under construction in Orange County contrast with the county’s multitude of older single-story or “garden” offices.

The trend toward vertical office construction was triggered in part by the county’s rising property values, which encourage builders to maximize land use, and by the willingness of some cities such as Irvine and Costa Mesa to allow increased densities for high-rises.

Clark Booth, vice president at the Newport Beach office of Coldwell Banker, said his company anticipates that 3.3-million to 3.5-million square feet of office space will be leased in Orange County this year, which would be an all-time high.

Not all buildings will run into leasing trouble as more office space comes onto the market, he said. “Quality buildings in prime locations will continue to lease up rapidly,” he predicted.

Services and High-Tech Brokers say that Orange County-based service and high-tech businesses have grown phenomenally in recent years. The high-rise office complexes now under construction, they say, will help satisfy the new demand from lawyers, accountants and computer and telecommunications firms for “Class A” structures in a more prestigious, urban setting.

“There is very little existing space available today to satisfy the needs of major companies wanting to relocate in the next 90 to 120 days,” said Booth of Coldwell Banker.

So developers are simultaneously bolting ahead with new office projects, taking a gamble that the economy will not go sour before they can take advantage of the revived leasing market. “The expectation in the building community is that the economy will continue strong through 1985 and into 1986,” said Mike Oberst, vice president of development for Torrance-based Transpacific Development Co, which is building a $200 million high-rise office complex called South Coast Metro Center in Costa Mesa.

Oberst said developers accept the prospect of competing with other new buildings coming on line and having to wait 12 to 18 months to lease their buildings “You always face competition in any dynamic market place,” he said.

Already, he said, a “tenants’ market” has emerged in the pre-leasing of new buildings, as landlords again are more frequently offering prospective tenants bonus-size office improvement allowances, rent reductions and other come-ons.

The Grubb & Ellis report observed that the Greater Airport, which also includes existing office buildings in Newport Beach’s Newport Center, “dominates the office market in Orange County. It contains almost 50% of the existing supply of space and 67% of the under-construction projects.”

Second to the Greater Airport Area in office space is central Orange County, which contains 23% of the existing and 13% of the office space currently under construction.

Anaheim “could become a real force in the county’s office market with the development of more than two million square feet of quality, high-rise space now being planned by Cabot, Cabot & Forbes” in the Anaheim Stadium parking lot, said Dave Hibbard, vice president and head of Grubb & Ellis’ Anaheim office. But construction on the first phase of the development, an 18-story office building, has been stalled by litigation.

Both west and south Orange County are offering suburban-like office projects as an alternative to tenants desiring less congestion, a new low- or mid-rise environment and lower lease rates,” said the Grubb & Ellis report, noting that the south county contains 7% and the west county 11% of the existing and under-construction office supply.

The report described north Orange County’s office market as “still in its infancy stage” claiming only 2.9% of new office construction and 8.6% of the entire existing and developing supply of office space.