OC Beats LA Office Teardowns

Orange County has millions more square feet of conversions in the pipeline than Los Angeles, which has about three times the population.

The O.C. has 4.2 million square feet of office space earmarked for conversion to another use. That represents 4 percent of its total office market. Los Angeles, on the other hand, has 1.2 million square feet of office space set for conversions or teardowns — equating to 0.26 percent of its total office market, according to CBRE.

The disparity is in part due to the O.C.’s stronger fundamentals such as lower vacancies and higher effective rents; the lowest monthly rent per unit in an Orange County submarket doesn’t drop below $2,000, but in a Los Angeles counterpart it does, per CBRE market reports. Another aspect may be desirability and the other may have to do with a recent oversupply of apartments in Los Angeles.

In Orange County, the office buildings that are being demolished are often low rise, but in Los Angeles, they’re high-rise and on less land and a smaller lot doesn’t always lend itself to multifamily redevelopment.

Land can be worth more than office buildings themselves, so it makes sense to tear the buildings down and replace them with residential, CBRE’s Greg Sullivan said. People want to live in Orange County and will pay the price. The average rent per unit is $2,861 in Orange County. In places like Newport Beach it’s $3,561.

“It’s kind of urban living within a suburban neighborhood,” Sullivan said.

Orange County is home to some of the safest cities in California, has reputable schools and is less densely populated — and parts of the area hold higher home values than parts of Los Angeles, so that land lends itself to reuse.

Meritage Homes acquired a vacant office property in Orange County earlier this year with plans for residential conversion. The homebuilder paid $19.2 million for Harbor Associate’s 111,500-square-foot office building in Santa Ana and re-entitled it for residential conversion for about 80 townhomes. The company was willing to take on that lengthy and expensive process because “the office building wasn’t worth as much as the land residual value was for the townhomes,” said Sullivan, who represented the seller.

But newer, ground-up apartments are selling for far below replacement costs in Downtown Los Angeles, Newmark’s Kevin Shannon said. Landlords are offering concessions in Los Angeles but not in Orange County, where the vacancy rate is low and rent is increasing. That translates to higher investment sales prices in Orange County than Los Angeles.

“Apartment deals in markets like Downtown L.A., which have been a little bit challenged, are trading at such substantial discounts,” Shannon said. Downtown there are a lot of office buildings that could be converted but aren’t cheap enough to justify it, Shannon said.

That doesn’t mean conversions aren’t happening in L.A.

There are owner-user office building conversions underway in L.A. that are actually closer to demolitions that aren’t tracked in the data, CBRE’s Grant Goldman said. Besides residential, developers are also converting offices to data centers.

MUFG sold a 410,000-square-foot office property on 20 acres of land at 1980 Saturn Street in Monterey Park last year for $33.5 million, Goldman said. The office building had data center zoning. Now it’s being demolished and adapted for that use.

“That data center is probably going to be worth more than what the Class A office is selling for right now,” he said.

Rexford Industrial purchased Herbalife Plaza at 950 West 190th Street in Torrance for $41 million in August last year, Goldman said, and plans to demolish the owner-occupied office property and turn it into an industrial space.