Central County Grows Up : Boom in High-Rise Offices Hits Older Cities

Orange County’s latest commercial building boom isn’t taking place in the hills and canyons south of Mission Viejo, or in the posh and clubby Newport Beach-Costa Mesa-Irvine area.

Instead, residents of some of the county’s oldest cities--Santa Ana, Garden Grove, Anaheim and Orange--are witnessing a dramatic change in the skylines above their homes.

A smattering of new high-rises already punctuates the landscape around Anaheim Stadium and the soon-to-be-renamed Fashion Square Shopping Center in Santa Ana. And by the end of next year there will be a virtual forest of high-rise office buildings spreading out from the confluence of the Santa Ana, Garden Grove and Orange freeways.

Since the beginning of the year, developers have begun construction or planning of almost 7-million square feet of new office space in the central part of the county--the majority of it in high-rise projects of six stories or more.

In the past, only about 500,000 square feet of office space has been leased in that part of the county each year, leaving wide open the potential that the area could become overbuilt, glutting the market with new, unfilled space.

‘No Dumb Developers’

Even so, said Greg Sherwood, a sales consultant for Coldwell Banker Commercial in Anaheim, “if a developer gets money, he’ll build. There are no dumb developers, only dumb lenders.�

Industry analysts, realtors and leasing agents say they are confident that the central county’s market for office space--its ‘absorption rate’ of new square footage--will remain strong despite the huge amount of new space that is about to be unleashed.

As an example of the central county’s strength, Sherwood cites State College Plaza, a six-story, 118,000-square-foot building near Anaheim Stadium. In less than 30 days from completion of the building, Sherwood said, the building is 20% leased. “That much space that quickly is considered very strong leasing activity,� he said.

Tom Greubel, a central county commercial office salesman with Cushman & Wakefield, said that while leasing specialists in other parts of the country consider a project unsuccessful if it opens with less than 35% or 40% of its space pre-leased, the competition in Orange County is so tough that pre-leasing of 15% to 25% of a building makes it a successful showing.

Although the new tax laws coming up and the county’s increasing vacancy rate for office space suggest that some of the rosy forecasts for sustained growth in the central county are simply cases of realtors whistling in the wind, there are a number of solid reasons for the construction boom.

And there is backing for analysts’ contentions that, for at least the next three years, the central county will remain a healthy leasing market without deadly competition from the John Wayne Airport area.

A primary reason is that the two office centers seem to attract quite different types of clients. The airport area high-rises draw law firms, corporate headquarters and smaller research and development operations--tenants who number a choice address among their principal requirements. The central county’s draw is for companies dependent on big sales and clerical staffs--firms that need more space and proximity to a large work force.

System of Roads

But the main reasons for the increase in construction in the central county are that it already has an expensive system of roads in place, there is a huge supply of housing nearby, it is close to the Los Angeles urban area, and it is one of the last places left in the county with land that is relatively flat and easy to build on.

Three or four years ago, developers were scrambling to build around the airport area, primarily in Irvine, Costa Mesa and Newport Beach.

But as the number of prime parcels declined and land costs increased, developers have begun turning to the central county, where available and less-expensive land is one of several features attractive to companies with large numbers of employees.

The central area also enjoys closer proximity to the county’s pool of skilled labor.

Fully half of the county’s labor force lives in the central county area, according to Kevin Foster, an office leasing and sales specialist with Norris, Beggs & Simpson in Newport Beach. Almost a third of the county’s workers live within a five-mile radius of Anaheim Stadium, said Chris Sausser, head of office marketing for the Anaheim branch of Grubb & Ellis.

And the central county is a closer commute than the airport from the developments outside the county that have bedroom communities for many workers who cannot afford Orange County’s steep housing prices.

The central area also is served by four freeways and the recently completed $17-million Santa Ana Regional Transportation Center--a hub for Amtrak commuter trains, regional and interstate bus lines and airport shuttle services.

Even though they are overcrowded, there are more freeways feeding into the area than service the airport commercial centers--a strong inducement for locating in the central county, Foster said. Additionally, the central county area is served by a number of major surface streets that can siphon traffic from the freeways and help feed it into the Los Angeles and Riverside areas.

Cites Typical Clients

The typical clients for central county office space are “sales-oriented companies, people who are labor-intensive, like insurance companies,� said Russ Johnson, sales manager for Grubb & Ellis in Anaheim.

Large accounting and law firms as well as other companies with substantial sales or clerical staff want a location which gives access to Los Angeles and the Inland Empire, Johnson said. The location gives them better access to their markets and makes it easier to recruit employees.

Several of the investors backing developments in the central county are, in fact, major insurance companies. And some of those companies plan to occupy a big portion of the office space they are helping to finance--an uncommon practice that reduces the immediate value of their investment because they effectively are leasing from themselves.

On Owens Street in Santa Ana, for example, a 10-story, 220,000-square-foot office building is being jointly developed by Aetna Life & Casualty and Lincoln Properties Co.--with Aetna slated to occupy 100,000 square feet of the building when it is completed in early 1988.

State College Plaza, at the corner of State College Boulevard and Orangewood Avenue in Anaheim, is a joint venture of Connecticut Mutual Life and Dunn Properties Corp. One six-story, 120,000-square-foot building is completed and plans call for an additional 405,000 square feet of office space in the future, contingent on leasing of the first building.

But even with big-bankroll investor-tenants creating an instant demand for space, the low 12.3% vacancy rate in the area is sure to increase when all the space under development begins pouring onto the market, says Kenneth Hulbert, a vice president at the McCarter-Burke’s office in Orange.

Sherwood and Sausser both point to the airport area as an example of what can happen when there is too much construction.

The airport area now has “more vacant buildings than ever before,� and the real cost of leasing space there isn’t much more expensive than in other areas of the county because of the discounts and amenities offered as inducements by developers, Sherwood said. “There’s a good demand,� he said, “just a heckuva lot more supply.�

sh Fear Slowdown

Several analysts said they fear that the large amount of square footage soon to be available on the market will combine with the impact of changes due in federal tax law to create a slowdown in new construction throughout the county--leaving many developers with a lot of empty office buildings.

Still, Hulbert contends that projects in the central county are being built by the “sophisticated developers� who have taken all of that into account.

Their concerns about overbuilding, Hulbert said, are “probably outweighed by the long-term advantages. They are building here because they want to be here.�

The main effect of the new tax measures will be a reduction in depreciation write-offs for developers.

Those who normally use write-offs for interest and depreciation to pay the carrying costs on a vacant building no longer will be able to accelerate depreciation, Sherwood said, and probably will no longer be able to cover their carrying costs.

Developers who base the financial success of their projects on their after-tax earnings will have to find another way to operate, Layton said.

But major developers like Koll build on a cash-flow basis.

Some ask their joint-venture partners for enough cash to cover debt service and after-construction expenses. Others, Sherwood said, use revenue from completed projects to help meet carrying costs on a new project. Neither group of developers, he said, will be constrained by the tax changes.

Major joint-venture partners in the central county--companies like Metropolitan Life, Aetna or Connecticut Mutual--have always backed projects in which the “buildings have to make sense on their own,� Hulbert said. Because of that, he said, developers in the central county will feel only a minimal impact from the pending tax law changes.

And even if the flow of private investment capital slows down, the construction boom in the central county still will take place--simply because the cities in that area are eager for high-rise projects and are willing to provide money to get them.

Provide Incentives

Santa Ana, Anaheim, Orange and Garden Grove all use their redevelopment funds to sweeten the pot for developers by providing incentives such as low-cost loans or city-installed roads, sewers and utilities. The rationale is that development is a way to spruce up the cities’ downtowns and add to their tax base.

Gary Chappell, sales manager for Coldwell Banker in Newport Beach, credits the work of city redevelopment agencies with attracting a lot of the development to the central county.

“Those municipal agencies have contributed several million dollars to the success of various projects,� Chappell said. “Dealing with those agencies, we’re finding they’re becoming even more aggressive.�

The Koll Co. is developing in Orange what ultimately could be a project of more than 1 million square feet.

Steve Layton, project manager for the project--which includes a 45,000-square-foot athletic club and a 12-story all-suite hotel, said the city’s Redevelopment Agency has been “a big assistance.�

Real estate economist Alfred Gobar cites the infrastructure improvements by the redevelopment agencies as their most significant contributions.

But, to developers and leasing agents, what redevelopment agencies do best is to grease the bureaucratic wheels. Santa Ana assigns a staff person to each major project being built in the city. Other redevelopment agencies help shepherd projects through local approval processes.

Garden Grove’s Redevelopment Agency, for example, helped speed up city consideration of plans for the $86-million Plaza Alicante project on Harbor Boulevard. The agency also has offered incentives ranging from tax-exempt financing and Small Business Administration loans to other projects on a case-by-case basis.

The $250-million renovation of the existing Fashion Square shopping center in Santa Ana--the cornerstone of the entire MainPlace project--was “highly contingent on redevelopment funds,� particularly those used to pay for street improvements, said Gobar, the real estate analyst.

MainPlace, with 1 million square feet of retail space and an additional 1.5 million feet of office space, will surround the renovated Fashion Square--a joint venture of C.J. Segerstrom & Sons and JMB Federated.

Like the proposed 93-acre Foreign Trade Zone--where customs duties are suspended for companies making products for export--MainPlace is the kind of project that creates a snowball effect--providing a “catalyst to make additional development in an area happen on its own,� said Robyn Simpson, economic development manager for Santa Ana.

Like other central county cities, Santa Ana has seen a strong upturn in real estate values as a result of increased commercial development.

An empty 18-acre parcel across from the MainPlace development was offered four years ago for between $12 and $15 a square foot, according to Sherwood of Coldwell Banker. The asking price now is $28 per square foot. “By the time someone is able to develop that whole parcel, land costs will be over $30� a foot, Sherwood said.