Office-to-Industrial Conversions Expanding in Orange County

A seismic shift—it could be small, it could be large—appears to be under way in Orange County, where the fault line between a booming industrial sector and a sagging office market can be found in what might be the nation’s largest cluster of office-to-industrial conversions.

According to a Q1 market report from JLL, 17 properties encompassing 3.2M SF of office space are slated for office-to-industrial conversion in Orange County, part of a booming SoCal industrial market that as a region now has an industrial footprint of more than 2.3B SF.

Elevate @ Harbor in Santa Ana, comprised of two office properties, is being demolished to make way for proposed industrial facilities after being sold in February.

This week, In a strategic about-face—which the company is hoping becomes a nimble pivot—Kearny Real Estate has decided to demolish an Orange County office campus it recently spent $15M to renovate and replace it with a warehouse.

Los Angeles-based Kearny is partnering with Dune Real Estate Partners to build a 163K SF warehouse at 3130 South Harbor Boulevard, replacing two office buildings, the companies announced this week.

Kearny bought the two-building office campus in 2018 for about $35M and invested an additional $15M to renovate it, aiming to attract a millennial workforce.

Like many other real estate companies in the post-pandemic era, Kearny is shifting from an office strategy in SoCal, aiming to get a piece of the booming industrial market. The mammoth Industrial footprint in Southern California is still growing.

“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,” Dan Broder, a senior associate at Kearny, said in a statement.

Net absorption in the Orange County office market was negative 1.1M SF, with vacancies approaching 18%, sublease vacancies of more than 2.3M and—perhaps most telling of all in terms of longer-term trends—absolutely no new construction got underway in the county, according to JLL’s Q1 2023 market report.

Leasing volume declined in the first quarter in Orange County as companies started to tighten up budgets. Amid continued economic uncertainty, many companies focused on streamlining their operations, resulting in a quiet quarter for the office leasing market. Compared to Q4 2022, leasing declined 10% and average leasing size shrank 38% in Q1 2023, the report said.

Sublease availability reached a record high of 3.9M SF in Q1 in Orange County, a 3.6% quarter-over-quarter increase. Tech tenants contributed nearly half of the additional sublease space due to their on-going reassessment on office demand.

Driven by flight-to-quality, average asking rent grew 1.8% over the Q4 level as premium buildings command higher rates over the market. “Landlords facing elevated vacancies offered high concessions to attract occupiers, resulting in tenants securing better contracts despite higher face rents,” JLL said.