Looking for cheaper quarters, IBM will build a 20-story office building near South Coast Plaza next year in a joint venture with Costa Mesa developer C.J. Segerstrom & Sons.
International Business Machines will sign what is thought to be the third-largest lease in the county, occupying 164,000 square feet, officials said Wednesday, or more than a third of the building when it opens in 1991. Local brokers said the deal is probably worth at least $90 million.
The computer giant, which will own a chunk of the 440,000-square-foot building, will consolidate most of its county operations in the new tower and move 825 of its 900 local sales and service employees there.
IBM said it will get out of the deal cheaper rent, an ownership stake in a prestigious building and a piece of the rents from other tenants. The firm will also get a say in the building's design, which is in the hands of architect Cesar Pelli & Associates of New Haven, Conn.
The building will go up in the northwest corner of the intersection of Anton Boulevard and Avenue of the Arts, in what is now the easternmost part of the Westin South Coast Plaza hotel's parking lot.
IBM is already Segerstrom's largest tenant in the South Coast area, which has grown to be Costa Mesa's commercial center in just a few years. IBM leases 122,000 square feet in two Segerstrom buildings near the mall. Those two offices will empty when IBM moves into the new building at 600 Anton Blvd., where IBM will lease seven or eight floors for 10 years.
Only the Western Digital lease with the Irvine Co. for 380,000 square feet at Irvine Spectrum and the Taco Bell lease for 260,000 square feet with the Koll Co. at Koll Center Irvine have been larger in the county.
Some commercial real estate brokers said the large chunk of older space that IBM leaves could hurt the local office market, which is already running a vacancy rate in the low 20% range. And the rate in the South Coast Plaza area is a little higher still, brokers said, because prospective tenants are sometimes scared away by the crush of traffic that encircles the mall at commute hours and lunchtime.
Even though Segerstrom buildings in the area have some blue-chip tenants, brokers said Costa Mesa still lacks the cachet of Newport Beach and Irvine as a business address. Rents are up to 20% lower around South Coast Plaza than the more popular area around John Wayne Airport a few miles away, said John J. Brodbeck, research director in Orange County for Grubb & Ellis, a real estate broker. Airport rents start at about $1.55 per square foot per month and top at more than $2 a square foot.
For those reasons, brokers speculated that IBM probably negotiated an attractive deal with Segerstrom. IBM has been a major Segerstrom tenant for about eight years. Brokers said the privately held developer and landowner was probably eager to hold onto such a large tenant.
Both IBM and Segerstrom have built and owned buildings with partners before, but this is the first time that Segerstrom has had a joint venture with a tenant.
Neither company would discuss the details of the deal. It's "fair to assume," however, that the companies are equal partners in the project, said Chase McLaughlin, managing partner of the joint venture for Segerstrom.
Such joint ventures are becoming more frequent, brokers said. Building owners desperate for tenants in the county have been offering a piece of their buildings for incentives, brokers said. But generally only larger tenants cut such deals, because smaller ones lack expertise in real estate and "prefer to keep their money in their own business, which they're familiar with," one broker said.
At the going rate of $200 to $250 per square foot for similar buildings sold in the area, the new Segerstrom building would be worth $90 million to $110 million.
IBM had originally agreed to move into Segerstrom's giant Home Ranch project just north of South Coast Plaza off the San Diego Freeway. But that project was killed in November by Costa Mesa voters worried about the traffic it would generate. McLaughlin said Segerstrom is awaiting a city study of zoning patterns before deciding whether to submit new plans for Home Ranch.
The last building Segerstrom built in the area was the 21-story Center Tower, which opened in 1985.