As office vacancies continue rising in Orange County, owners of a two-building campus in Santa Ana are taking the unusual step of demolishing the recently renovated Elevate@Harbor and converting the 8-acre site into a logistics hub.
Kearny Real Estate Co. and Dune Real Estate Partners are collaborating on a 163,000-square-foot industrial facility that will replace the mid-rise office towers at 3130 and 3100 S. Harbor Blvd.
Kearny bought the campus for $34.8 million in 2018 and spent a year on a “multimillion-dollar renovation,” the company said.
Already zoned for industrial use by the city, construction on Harbor Logistics Hub will begin early next year, Kearny reps told us.
Plans for the wrecking ball have at least one tenant plotting its exit.
Optima Tax Relief, which holds the marquee at 3100 S. Harbor, has leased its headquarters there since its founding in 2011. The company is shifting 3.6 miles east to Griffin Towers on Hutton Center Drive, said CEO David King. (Notably, the Griffin twin towers adjacent to the 55 freeway sold at a 36% loss in April when Barker Pacific Group and Kingsbarn Realty Capital bought it from Blackstone for $82 million.)
King said the move will be “bittersweet.”
“We were already thinking about moving as this building may collapse on its own next year,” he said via email Thursday. “We had many memories here over the last 12 years, but it is past its prime.”
The campus, comprised of three- and five-story buildings with “glass curtain walls,” is 41 years old.
King and his team are part of a post-pandemic work trend that requires less office space. The company recently launched what it calls an “Opti-Flex” schedule — a hybrid work week with two days in the office and three days remote.
The workplace pivot has Orange County swimming in available office space.
There were 27 million square feet of available office space and a vacancy rate of 13.3% in the first quarter of 2023, according to a May 18 report by NAI Capital. That’s a high not seen since the Great Recession when unleased office space peaked at 30.4 million square feet in early 2010, said J.C. Casillas, a managing director at NAI and the report’s author.
Available sublease space hit a milestone, too, rising to 4.6% from the previous quarter and up 34.4% year over year, surpassing the all-time high set during the Great Recession with 4.5 million available square feet, the report states.
“Both landlords and tenants will face distress, leading to a challenging recovery period that will impact real estate values,” Casillas wrote in the report.
Casillas on Thursday called the Elevate property owners’ demolition plan “remarkable” and the first he’s heard of, so far, in Southern California.
“Many are trying to figure out the next “highest and best use” for empty office buildings, especially in the edges of market areas near transportation corridors,” Casillas said.
The Elevate campus is surrounded by industrial properties and small warehouses and sits just 1 mile from the 405 freeway.
“We were well on our way to stabilizing the campus when the pandemic hit,” said Dan Broder, an assistant vice president at Kearny who is overseeing the redevelopment project. “Taking into account the ongoing weakness in the Orange County office sector, our analysis showed that, despite what we’ve already invested, the optimal long-term use for the property was industrial.”
The new facility is due in 2025, Broder said, and will offer “a welcome relief for local companies that are struggling to find industrial space in such a tight market.”
Source: Orange County Register
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