A sign of the times: Tearing down an emptying Orange County office complex to build a warehouse

In the hierarchy of commercial real estate, office space has long been king.

Developers and landlords lived by the conventional wisdom that there was no better use for your square footage than business offices because they commanded higher rents than industrial spaces.

Simple math, the thinking went.

Well, not so simple anymore. At least in Santa Ana, where a perfectly good office complex is being demolished in a dramatic demonstration of how weak the office rental market has become and how deep the demand for Amazon-style distribution centers runs in Southern California.

The owners of the shiny glass building on Harbor Boulevard close to John Wayne Airport made the counterintuitive calculation that they will be better off owning warehouses than trying to wrangle tenants willing to pony up for conference rooms and corner offices.

"We had to make a strategic shift," said Dan Broder, who is in charge of the redevelopment by Kearny Real Estate Co., owner of the property formerly known as Elevate @Harbor.

The shift was prompted in large part by the COVID-19 pandemic, which contributed nationwide to shrinking office populations and rising demand for home delivery of all manner of goods. Four years on, overall demand for offices remains well below pre-pandemic levels, raising questions about how many buildings built for white-collar labor still have a viable economic future.

"There are a lot of office owners looking at their properties and wondering if those properties still make sense as offices," said Michael Soto, Southern California research director for real estate brokerage Savills.

Some have decided they don't, and the result has been a shrinking inventory of offices over the last year in several U.S. markets, including Orange County, Savills said in a recent report.

While those in urban centers making the decision to get out of the office game increasingly have looked to convert unloved offices to apartments, in some areas warehouses are hard to come by and, consequently, bring a premium, Soto said.

...continued

swipe to next page