A Look at 1986, and the Climate for ’87

Record-breaking construction in Orange County created an abundance of vacant office space and made 1986 a banner year for firms looking to move into prestigious high-rise buildings at bargain rents.

Office building owners were forced to compete fiercely for tenants and encountered increased resistance from local governments and citizens who contended that additional development would strangle already traffic-choked streets and freeways.

1986 was a year in which the focus of new office development began to shift away from areas near the John Wayne Airport and toward Anaheim Stadium in the central county--a trend that is expected to become more pronounced in 1987.

Pent-up retailer demand and a boom of discount operations also made 1986 a record year for construction of shopping centers, especially in the northern and central parts of the county where the population is densest. At South Coast Plaza, developer C. J. Segerstrom & Sons completed a $100-million addition across Bear Street from the main mall.

The only construction decline in 1986 was in industrial development.

An exception to that trend was found in the south county, where new employment centers are taking shape with the emergence of master-planned parks, most notable the Irvine Co.’s massive Spectrum industrial park and other acreage being developed for light manufacturing and research plants in the new community of Rancho Santa Margarita.

More than 5 million square feet of office construction is expected to be completed by year end, up from 4.1 million square feet in 1985 to set a second consecutive all-time record, according to Coldwell Banker.

Because of the frenzy of building activity--fostered by availability of land and financing--aggressive leasing efforts by building owners made no dent in the high overall county office vacancy rate. Grubb & Ellis predicted that 3.1 million square feet of offices would be leased in the county during 1986, almost double the 1.6 million square feet that was leased last year.

Although Orange County has the highest office absorption rate in Southern California, Grubb & Ellis predicts that at the end of the year office vacancies will hover at 23%--about the same as is being forecast for the end of 1987. Although new office construction is expected to taper off in 1987, the completion of buildings already in the pipeline is expected to add enough new space to keep vacancies high through next year.

In the airport area--where the Irvine Co., Segerstrom and the Koll Co. were slugging it out to fill their new high-rises--it was not unusual for a tenant to get a year’s free rent and free interior improvements for signing a five-year lease.

Citing the glut of office buildings near the airport, as well as a need to be a leaner and more efficient organization, the Irvine Co. in September dismissed 240 employees, or 18% of its work force, in the largest such cutback in the giant Newport Beach land developer’s history.

The layoff was part of a major shake-up that occurred at the Irvine Co. that resulted in decentralization of the firm’s operations and elimination of the position of corporate president formerly held by Thomas H. Nielsen.

Later in the year the company was foiled in its attempt to win voter approval in Newport Beach of its plans for a $300-million expansion of its Newport Center shopping and office complex.

Similarly, the Trammell Crow Co. in 1986 encountered opposition to its plans to develop high-rises and other commercial projects on the 162-acre Fluor Corp. headquarters site in Irvine.

Real estate analysts said that while commercial construction is starting to slow near John Wayne Airport, it is accelerating in the central county, especially in Orange, Anaheim and Santa Ana.

In late 1986, for instance, JMB/Federated Realty Associates Ltd. and developer Henry J. Segerstrom began the redevelopment and expansion of Fashion Square Shopping Center, which will be renamed Mainplace/Santa Ana and include up to 1.5 million square feet of new office space and two major hotels.

Office developers with new projects in the central county include Nexus Development Corp., Lincoln Properties, Tishman Construction Corp. and Tishman West Management Corp.

The Koll Co., creator of Koll Center Irvine and Koll Center Newport, also is expanding its commercial development into central Orange County, where next year it will begin building a 14-story office tower, 260-room hotel, athletic club and two restaurants in the first phase of a business complex to be called Koll Center Orange.