Irvine Co. Cuts Job Force 18%; Office Glut Cited : Soaring Vacancy Rates Bring Temporary Halt to Some Major Construction
Striving to adjust to an era of slimmer real estate profit margins and to a local glut of high-rise office buildings, Irvine Co. said Wednesday that it is dismissing 18% of its work force in the largest such cutback in the giant Newport Beach land developer’s history.
The company said in a prepared statement that it is dismissing 240 of its 1,343 employees as “the final step in an 18-month review and restructuring of management operations to respond to anticipated business activity.”
Company President Thomas H. Nielsen said about 30% of the employee cuts are in the company’s office development operation. He said the company has temporarily stopped the construction of additional office buildings because of soaring vacancy rates in the commercial district near John Wayne Airport, which has been the focus of a high-rise building boom.
“We didn’t expect the extent of the office building in the area and throughout Orange County,” Nielsen said. There is a 33% tenant vacancy rate in the high-rise office district near the airport--the highest rate in Orange County, according to the real estate firm of Coldwell Banker.
Has Major Projects
In the general area of the airport, Irvine Co. opened twin 12-story office towers in Irvine totaling 450,000 square feet this spring and will soon complete two more 15-story office buildings totaling 600,000 square feet in Newport Beach.
While the work force cuts are deepest in the company’s office construction sector, Nielsen said, all of the company’s divisions and operating entities will face cutbacks. He said Irvine Co. owner Donald Bren and the rest of the company’s executive committee have determined a “need to become a leaner and more responsive organization” in light of current economic conditions.
The company is caught in a cost-profit squeeze, Nielsen said. Lower inflation rates and proposed real estate tax changes are reducing the company’s expectations for increases in property values and rents, he said.
Meanwhile, operating costs are rising for various reasons, he said, including growing demands from local governments that the company pay for major arterial highways and freeway interchanges.
Since 1980, the company has begun financing $338 million in such road projects and expects to pay for another $200 million worth by 1991.
Irvine Co. owns 68,000 acres in Orange County, roughly one-seventh of the entire county.
Nielsen said the company also is feeling a financial pinch from the county’s reassessment of the company’s landholdings, which was triggered in 1983 when Bren acquired controlling interest in the company. The reassessment, which the company is appealing, raised the total valuation of the land by more than $2.1 billion and nearly tripled the company’s total annual property tax bill--to about $51 million.
“(Profit) margins are extremely tight; there is absolutely no question about that,” Nielsen said, adding that in response the company is attempting to lower its overhead. He declined to say how much of a cost savings the privately held company hopes to achieve by the employee cutbacks.
Employees affected by the cuts were notified Wednesday, Nielsen said, although they will be paid through July 7. According to a company spokeswoman, the employees will receive severance pay determined by length of service.
The company said the budget and personnel reductions will not halt its residential or commercial projects under construction, and the company will continue to process plans for future developments in the cities of Orange, Irvine, Newport Beach, Tustin and unincorporated parts of the county, “although the precise timing and sequence of these plans may be re-evaluated to respond to changes in market conditions.”
Still Strong Financially
Nielsen said “the company continues to be very strong financially” and will not slow its strong activity in apartment construction, residential land sales and construction, and industrial and retail development, including a $115-million renovation of Fashion Island, a posh Newport Beach shopping center.
Within the last two years, the company has gone through a major restructuring toward decentralization, capped last month by the removal of companywide administrative duties from Nielsen. The company is now being run by an executive committee of directors, including Nielsen, who meet weekly.
The company’s six building and property management operations have been spun off into semi-autonomous divisional companies with their own presidents.
Nielsen, who is still the corporation’s principal spokesman and remains in charge of obtaining government approvals for the company’s development projects, said the dismissals are intended in part to eliminate duplications that have stemmed from the restructuring. When the company merged its office and industrial operations last month into a new firm called Irvine Industrial & Office Co., it announced the dismissal of 30 employees.
These recent cutbacks follow a splurge of growth during which the company had added about 300 new employees during the last three years. Some Orange County real estate officials said Wednesday that the company “had a lot of fat” that needed to be trimmed.
“I think they overreached and are starting to react to the economy,” said Robert Reicher, manager in charge of real estate consulting at the Newport Beach office of Deloitte, Haskins & Sells. Reicher said he has no concerns about the financial health of Irvine Co.
“They certainly have deep pockets,” he said, “but even deep pockets get prudent.”
