Commercial Building to Stay Hot Where It’s Been Hot

Anaheim. The Irvine Spectrum. John Wayne Airport. The coast. Rancho Santa Margarita.

Those will be the hot spots next year in commercial real estate, as they were this year, experts say. Anaheim and the coast will be the place for new hotels. The Irvine Spectrum and Rancho Santa Margarita will be big on new factories and warehouses. And the John Wayne Airport area once again will be the hottest office market in the county.

Let’s take offices first. When all the figures are in, about 3 million square feet of office space will have been built in the county this year, estimates commercial real estate broker Grubb & Ellis. That’s about the same as last year. If you combined the two years, you would get more office space than is contained in one of the massive towers of New York’s World Trade Center.

But each year 3 million square feet gets leased too, so the vacancy rate for offices has not budged much from around 22% in a couple of years. That is high but not uncomfortably so, consultants say.

Developers also want to get as many buildings constructed as possible before any government body imposes limits on growth. And the big-pocket partners many developers have taken on--insurance companies, pension funds and the like--are anxious to invest in Southern California real estate. So the buildings keep going up. Next year should be about the same, say local brokers: Three million square feet should go up, and three million square feet should get leased.

A good many of those buildings will be constructed in the Irvine Spectrum, the Irvine Co.’s massive office and industrial park at the junction of the San Diego and Santa Ana freeways. Then there’s the John Wayne Airport area, which has become something of a “downtown” for the county.

“The airport is still the most desirable market in the county for tenants,” says John J. Brodbeck, Orange County research director for Grubb & Ellis.

Factory, warehouse and laboratory space runs a considerably lower vacancy rate, about 14% for the 154 million square feet in the county. That’s because land is so expensive in Orange County--and industrial buildings usually pay such a low return by comparison--that few are being built.

The northern end of the county may see a slackening of demand for industrial space because manufacturers there tend to be either makers of low-technology products--and thus most likely to flee the county’s high rents and labor costs--or aerospace firms that probably will be hit by cutbacks in defense spending. The newer, high-tech companies in the southern half of Orange County, however, still need a lot of space.

So the hot spots in the industrial market are in South County, places like the Spectrum and the big, master-planned communities like Rancho Santa Margarita, where the developers are mixing offices and factories with residential neighborhoods. Between them, the Spectrum and Rancho Santa Margarita could account for more than a million square feet of new industrial space next year, according to their developers’ projections.

In hotels, says James Burba of consultant Pannell Kerr Forster, there won’t by any hot spots in the county next year. Instead, he says, there will be “only a couple of what you might call lukewarm spots.”

That is because not much construction will occur next year. The action in 1990 will be on cutting a deal to build on some of choicest parcels of land in the nation. The building will come later.

At the Irvine Co.’s Irvine Coast, a hilly, breathtaking stretch of land between Newport Beach and Laguna Beach, construction will start in 1991 on the first of three hotels. Only Marriott has been signed up to build one; contracts for the other two remain to be negotiated.

Two big sites in Dana Point that were controlled by an Australian company called Qintex for a few months this year are now up for grabs again after Chairman Christopher Skase ran out of money. Real estate sources say feelers have come from as far as the Pacific Rim. Here again, nothing is likely to be built next year, but there is certain to be much wheeling and dealing.

And then there are four hotels planned for Huntington Beach, with one--a Hilton--actually under construction.

Anaheim will do moderately well because the convention center and Disneyland lure lots of tourists there. Occupancy rates are already in the neighborhood of the mid-70s, which is a fairly healthy neighborhood. The coastal resort hotels--some of which may get a construction start next year--will draw an entirely new class of upscale tourist, essentially creating their own market.

That leaves the airport area, where a construction boom a few years ago means there are way too many hotels now. Occupancy rates are in the anemic 60%-70% range and hoteliers can’t charge nearly as much as they would like to. The situation is getting better, though, and it is likely to improve still more: When the expanded John Wayne Airport opens next year, it could mean a big increase in business for these hotels.

No new hotels are planned for the airport area next year, although developers are sniffing around sites that include the South Coast Plaza area, experts say.

The hotel trouble spot is expected to shift to the northern half of the county, to cities like Brea, Placentia and Fullerton, where many hotels have been built recently and where the market is expected to be extremely competitive.

All in all, experts expect the county’s robust economy to once again provide a generous supply of office tenants, hotel guests and light industrial companies to fill existing and new structures.

RED-HOT REAL ESTATE

Here are the areas that brokers, consultants and developers pick as Orange County’s real estate hot spots for the next year and beyond:

HOUSING

Cedarbrook in Aliso Viejo

* Aliso Viejo: A 6,600-acre community being developed by the Mission Viejo Co. So far, 3,300 homes have been built, and as many as 500 new homes could be built here next year. The project eventually will have 20,000 homes.

* Rancho Santa Margarita: A master-planned community, including shops, factories, offices and homes being developed by the Santa Margarita Co. About 1,100 homes were sold here last year and 200 new apartments units completed. About the same number of homes and apartments will be built in 1990. Eventually, the town will have more than 40,000 homes.

OFFICES

Irvine Co.’s Spectrum complex

* John Wayne Airport area: Emerging as Orange County’s downtown. Half the 50 million square feet of office space in the entire county is here. About 5 million million square feet is vacant. This year about 1.5 million square feet of office space near the airport was leased. Another 1.2 million square feet is under construction and some big leases could be signed soon.

* Irvine Spectrum: The Irvine Co.’s office and industrial park at the intersection of the San Diego and Santa Ana freeways. About 650,000 square feet was leased this year and another 600,000 planned for construction.

HOTELS

The Disneyland Hotel in Anaheim

* Anaheim: There are 8,300 rooms in Anaheim’s 17 biggest, most expensive hotels. The convention center and Disneyland draw thousands of tourists each year, and the occupancy rate was estimated earlier this year to be in the 70% range. No big new hotels are under construction, but several hotel developers are contemplating building here.

* The coast: There are hotels on the drawing boards from Huntington Beach, where a Hilton is going up on the waterfront, to Dana Point, once a quiet little South County beach town and now a city of posh resorts. Not much will be built in 1990, but two or three big hotels will eventually go up on the Irvine Coast between Newport Beach and Laguna Beach, three more in Huntington Beach, and some will likely be built on choice sites in Dana Point.

INDUSTRIAL

* Irvine Spectrum: The Irvine Co. has about 3.5 million square feet of industrial space and has sold some of the rest of its land to companies that want to build their own buildings. The company leased about 800,000 square feet of warehouse and light industrial space this year and the year before. About the same amount will get built--and is expected to be leased--next year.

* Rancho Santa Margarita: In an effort to ease traffic congestion, the Santa Margarita Co. has been developing its own industrial buildings near the housing it builds. There was 1.5 million square feet of office and industrial space either occupied or under construction here. About 545,000 square feet of space was sold or leased this year; next year it’ll be 600,000 square feet, according to the company.