OC Business Journal

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Amazon, Rexford Lead Charge for Infill Spots

■ By MARK MUELLER

Office market sees banner year, as industrial developers snap up buildings

Orange County’s office market was an active one for big-dollar sales in 2021, with a halfdozen deals topping $100 million, according to real estate brokerage data and records from real estate market tracker CoStar Group Inc.

Despite lingering uncertainty over the future of offices post-pandemic, investors kept busy. In total, sales volume here last year was the strongest since 2017, according to a recent report from the Irvine office of commercial brokerage Newmark.

One reason for the dealmaking: “The office market is on the way to recovery,” said Newmark’s year-end report for OC’s office market, which placed office vacancy rates here around 15.9%.

OC’s base of office space is around 96 million square feet.

“While public health conditions continue to cause uncertainty, office occupancy continue to improve,” the brokerage said.

1.7M SF in Flux

Another reason for the solid pace of office deals: buildings are increasingly being bought for future industrial use, not office use.

At least a half-dozen office sales for $35 million or more last year, including two over $100 million, were for properties that were bought by investors who expect to turn those sites into warehouse and distribution sites, according to Business Journal data.

Those offices total more than 1.7 million square feet, representing nearly 2% of OC’s

base of office space.

Several other similarly large land deals, for sites once expected to be offices and other uses, were snapped by industrial developers. That includes multiple prominent spots on Jamboree Road and Von Karman Avenue in OC’s largest office market around John Wayne Airport.

The office properties bought by industrial developers followed a similar playbook, according to Newmark.

They “predominately house older, suburban office buildings (30+ years of age), are near established industrial corridors, have proximity to major freeways and are on large parcels that are ideal for large-box industrial construction with deep truck courts,” the company’s latest industrial report says.

Industrial developers have increasingly been paying top dollar for older office buildings in OC, including prominent office campuses in Lake Forest, Orange, Huntington Beach and Santa Ana, with an eye of converting them into new, last-mile distribution sites.

OC’s base of industrial buildings totals about 260 million square feet. Vacancy rates for the sector run around 2% or so, and are near all-time lows for the region.

Amazon’s World

The largest example of the office-to-industrial trend was seen in Brea, where Amazon in mid-October paid $165 million for Bank of America’s longtime call center in the city.

It’s Amazon’s largest reported real estate buy in OC.

The e-commerce giant is exploring turning the 30-acre site, now holding nearly 640,000 square feet of office space, into a distribution center, sources said in early November when the Business Journal broke news of the transaction, the largest office sale of the year locally.

No plans or time frame for the industrial project have been disclosed to date, though a late 2022 start for a project appears to be the earliest a redevelopment could start.

Bank of America said in October it would be terminating its lease for the campus at 275 Valencia Ave. this summer. The campus was long among the largest leased, single-user office buildings in OC.

The bank’s lease was scheduled to continue about another year beyond that, but its employees there have largely been working remotely since the start of the pandemic.

The Valencia Avenue facility is north of Imperial Boulevard, close to other industrial properties near the La Floresta mixed-use development.

Amazon’s real estate purchases in OC since mid-2020 are approaching $400 million following the Brea acquisition, according to Business Journal data.

Rexford Ramps Up

For Rexford Industrial Realty Inc. (NYSE: REXR), among the most active industrial investors in Southern California over the past several years, the office market proved to be its biggest source of local dealmaking in 2021.

Over half of the $200 million-plus of OC purchases for the REIT last year were for office parks.

Rexford’s largest two deals here last year were the $105.3 million purchase of Santa Ana’s 370,000-square-foot Pacific Corporate Center, and Orange’s 191,000-squarefoot Volt Campus, a 12.5-acre site sits between the Costa Mesa and Orange (57) freeways that it bought for $70 million.

The deals were made with an eye on longer-term redevelopment. Rexford said that the buildings will eventually make way for industrial projects once long-term leases expire for the existing office tenants.

“There’s more industrial development going on in Orange County than there has been in several years, in large part due to industrial land value spiking dramatically over the past six to 12 months,” Patrick Schlehuber, executive vice president of investments at Rexford, told the Business Journal in October, after completing those two deals.

“Hence why it makes sense to convert outdated suburban office buildings into new industrial product.” ■

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