Brisk R&D; Activity, Too : Builders Zero In on Offices, Small Centers

As the last half of 1985 begins, Orange County is seeing a massive office construction boom, a comeback for neighborhood shopping centers, and a major expansion of research and development facilities, according to analysts for Coldwell Banker, the county’s largest commercial real estate broker.

At the same time, office building vacancy rates are expected to soar and warehouses and manufacturing plants are in increasingly short supply, the real estate analysts found.

The county is in the midst of the briskest office-building activity in its history largely because construction financing is available again after several years, the Coldwell Banker analysts said.

Because financing is a primary force behind the building boom, they said, the office vacancy rate may climb from an average of 15.2% to about 20% by year’s end, temporarily matching the office glut of the 1982 real estate recession.

Unlike 1982, however, this year’s high office space vacancy is spurred by an expanding economy, according to a group of Coldwell officers who analyzed mid-year real estate trends.

Availability of construction capital and increased demand for office space by county-based businesses have prompted construction of 35 projects--totaling 6.6 million square feet--which are to be completed between now and mid-1986, the company said.

High-rise buildings--defined as eight or more stories--account for 16 of the buildings and 69% of the square footage.

Airport Area Busy

The most active office-building area is near John Wayne Airport, including the South Coast Plaza area and the Irvine Business Center, where 16 buildings totaling 3.6 million square feet are under construction.

Next busiest is the Anaheim Stadium area, which has seven office projects under construction, including the 315,000-square-foot Nexus Financial Center in Orange. Total office space being built in that area is more than a million square feet. Most of the new office buildings slated to be completed this year have yet to open. According to Coldwell’s figures, 10 office-building projects having a total 1 million square feet have been completed since the first of the year, with 20 projects totaling 4 million square feet expected to be finished by the end of the year.

Among the buildings to be completed this year are the 21-story Center Tower that C. J. Segerstrom & Sons is building next to the new Orange County Performing Arts Center; a 12-story high-rise and twin 11-story buildings that the Koll Co. is constructing in Irvine and a pair of 12-story office towers at Jamboree Center in Irvine being built by the Irvine Co.

Because of Orange County’s vigorous economic growth, primarily reflected in local business expansion, the county has substantially lower office vacancy rates than most of the state, including Los Angeles, San Francisco and San Diego, Coldwell officials said.

Leasing Prospects

During the first half of this year, 900,000 square feet of office space was leased in the county, and Coldwell anticipates that an additional 1.5 million to 2 million square feet will be leased during the second half. By contrast, 2.3 million square feet was leased during all of 1984.

Nonetheless, Orange County’s supply of office space is growing much faster than demand this year, and landlords are offering a variety of economic incentives in hopes of luring tenants to their buildings.

Although average rental rates dropped only a penny between March and June--to $1.58 per square foot--tenants frequently are receiving up to a month of free rent for each year of their lease, according to J. Clark Booth, a Coldwell vice president. Tenants also are being offered options to acquire ownership shares in some of the new buildings, he said, although few have shown interest in such equity participation so far.

Coldwell officials said they believe new office construction already has begun tapering off and will decline significantly next year from current record levels.

The Coldwell analysts said that investor and builder interest in shopping center construction also is gaining momentum after a lull of several years.

Besides expansions of regional malls like Fashion Island and South Coast Plaza, development and redevelopment of open-air neighborhood shopping centers have begun “all over the county,” said Coldwell Vice President Robert A. Peterson.

Neighborhood Centers

Four neighborhood shopping center projects totaling 261,000 square feet were completed this year and an additional 40 projects containing 5.6 million square feet of retail space are planned or are under construction, Peterson said.

Joining the traditional shopping center developers in the building boom, he said, are others such as Shappell Industries, primarily a home-building firm, that have ventured into retail development in the county.

Development of neighborhood shopping centers, Peterson said, is being fueled by burgeoning retail revenues, consumer demand for near-to-home shopping and rising rental rates that have made regional malls less attractive to certain tenants.

Although rents for retail space in new neighborhood centers have increased as much as 50% in the last two years, the rents in regional shopping centers are sometimes twice as high, Peterson said.

Meanwhile, discount retail companies such as Target Stores, Home Depot and Home Club have expanded into Orange County, where they are replacing supermarkets as the anchors for neighborhood shopping centers, he said.

Industrial construction also has picked up this year. Coldwell officials said approximately 4.5 million square feet of industrial buildings are under way--about double what was being built a year ago.

R&D; Facilities

Jim Bell, sales manager for Coldwell’s Newport Beach office, said that of the industrial construction under way, 75% is for research and development facilities and only 25% is for light manufacturing and warehouses, despite strong tenant demand for manufacturing and storage space.

There is only about a 10-month supply of basic manufacturing and warehouse facilities existing and under construction in the county, Bell said, compared to a 30-month supply of research and development facilities.

The reason for the imbalance, he said, is that the price of land in Orange County has become too high to justify its use by industrial tenants, who pay lower rents than the research and development companies or commercial and retail tenants whose interests are being served by the current construction boom.