Kearny switches plans with office-industrial conversion in Santa Ana

With a back-and-forth decision, Kearny Real Estate plans to demolish a newly renovated office campus in the Orange County city of Santa Ana and turn the site into a warehouse. 

The firm has partnered with Dune Real Estate Partners to build a 163,000-square-foot warehouse at 3130 South Harbor Boulevard, replacing two office buildings, according to an announcement on Monday. 

Kearny bought the office campus for $34.8 million in 2018 and spent a further $15 million to renovate it. At the time, Kearny said it hoped to attract a “millennial workforce” and add dining, plus indoor and outdoor communal spaces. 

Now, the firm has turned to building industrial real estate — an asset class that has soared in value since the pandemic, as more people have expanded their online shopping. 

Market statistics explain the strategy switch. Vacancy for office space in Orange County increased to 13.6 percent in the first quarter of this year, up from 11.9 percent in the same three months of last year, according to CBRE. 

Companies gave up about more 1 million square feet of office space than they leased in the first quarter, a CBRE report shows, with most of the move-outs occurring in Irvine Spectrum, South Coast Metro and around the John Wayne Airport in Santa Ana. 

In comparison to Orange County’s office statistics, less than 1 percent of industrial space was vacant in the first quarter, according to CBRE. And rents are still rising — 3.1 percent in the first quarter compared to the last three months of 2022.

“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,” Kearny executive Dan Broder, who is overseeing the development, said in a statement. 

The office campus will be entirely razed to fit the warehouse with 36-foot clear heights and trailer storage. Only about 7,000 square feet of office will remain.