Construction of Office Space Drops Sharply : Building: A year ago, there was a total of 3.9 million square feet under development. This year, the figure has declined to 2.8 million.

By MICHAEL FLAGG

July 11, 1990 12 AM PT

TIMES STAFF WRITER

Those inveterate gamblers, the developers, are getting their credit shut off, and it has resulted in a big drop in office construction in Orange County this year.

Last year at this time there were 3.9 million square feet of office space under construction. That’s more than 80 football fields’ worth.

Now there is only 2.8 million under construction, officials of Grubb & Ellis Co, a commercial real estate broker, said Tuesday.

The reason for the drop: Banks that loaned money on construction projects--and pension funds and insurance companies that invested in them--have been burned in such troubled real estate markets as Denver and Dallas. They’re not anxious to repeat the mistake in Orange County, which has way more office space than it can use even though plenty of tenants are still looking for space here.

New federal regulations after the savings and loan crisis have also made it difficult for even healthy thrifts to do a lot of lending in commercial real estate.

“The lenders are getting a lot more sophisticated, and they want to tune the market into demand more,” said John J. Brodbeck, research director for Grubb & Ellis’ Orange County operations.

Right now, the glut of space and ominously high vacancy rates often prevent landlords from charging reasonable rents. They’re also handing out months’ worth of free rent to get tenants to sign a lease and promising them lots of money to put the finishing touches on their new offices.

The vacancy rate was 21% at the end of the first half of the year in the county’s 670 larger office buildings, Grubb & Ellis said in its midyear report. The vacancy rate was unchanged from last year.

The one bright spot for landlords is the construction figures. In 1988, office space under construction hit a record 5.2 million square feet, equal to nearly a dozen of South Coast Plaza’s Center Tower office buildings, at 21 stories the county’s largest. But last year it slipped to 3.2 million and this year it will probably be even less, says Grubb & Ellis.

Still, there are 11 million square feet of empty office space around the county, nearly 5 million in the John Wayne Airport area alone, the county’s new “downtown” and its biggest office neighborhood.

In the event of a recession, that much empty space represents a “higher risk” to the economy of Orange County than that faced by some less active markets where fewer office buildings have been built, said Dennis W. Macheski, Grubb & Ellis’ southwest regional research director.

In fact, the amount of construction hasn’t dropped near the airport much at all. The huge developers operating there, such as the Koll Co. and the Irvine Co., can still get lenders to trust them by virtue of their size.

Still, a lot of developers have delayed projects near the airport and “there would be a lot more construction there today if it weren’t for the thrift mess and the fact there are too many buildings there already,” said Ron McElroy, a Grubb & Ellis broker.

Most of this year’s drop in construction occurred instead in the southern, less-developed half of the county, where a burst of construction last year has ended.

The scarcity of lenders has hampered smaller developers in the South County, McElroy said. Another reason for the drop: Most of last year’s construction occurred at the Irvine Spectrum, the Irvine Co.’s massive business park at the intersection of the San Diego and Santa Ana freeways. But fewer tenants are knocking on doors there this year, McElroy said. The Irvine Co. has raised land prices at Spectrum, scaring away some possible tenants.

“We don’t need any more (office) space down here anyway,” McElroy said.

Developers often keep developing if there’s money available, even in the face of a glut of buildings, because they need projects to keep their organizations working.

But some have turned cautious in the central part of the county--the older cities of Santa Ana, Anaheim and Orange.

Some of the big developers operating there are waiting to sign up a big tenant before building an office tower, said Chip Greene, a Grubb & Ellis broker. Meanwhile, that market is beginning to look better and better: The last big office building to open there was in November, 1988.

OFFICE CONSTRUCTION PLUMMETS IN SOUTH COUNTY

Persistently high vacancy rates and tightening credit have finally started to have an affect on the feverish pace of new office construcion on the county, particularly in the southern submarket, where vacancy rates have reached 29%.

SPACE UNDER CONSTRUCTION

Airport Area

2nd Quarter 1989: 1,988,936

2nd Quarter 1990: 1,975,777

South County

2nd Quarter 1989: 1,484,028

2nd Quarter 1990: 367,046

North County

2nd Quarter 1989: 252,967

2nd Quarter 1990: 229,365

Central County

2nd Quarter 1989: 143,000