COVER STORY, JUNE 2005

WESTERN OFFICE REPORT
Job and population growth help to warm up office markets.
Brian A. Lee

Western Real Estate Business checked the pulse of the region’s office market recently to see what trends are evident and how industry players are reacting. Job and population growth in places like metropolitan Phoenix have kept developers busy while those same conditions coupled with strong barriers to entry have really stoked the investment market in Southern California.

Kruse Oaks II near Portland, Oregon

The development is in direct response to existing customer expansion needs and will complement Kruse Woods V, located just across the street, says Patrick Callahan, senior vice president for EOP’s Seattle Region. The development will offer easy access to Interstates 5 and 205 and be just a 10-minute drive from the majority of offices concentrated along the Highway 217 corridor.

Project completion is slated for third quarter 2006. With that, EOP will own and manage 1.6 million square feet in the Kruse Way submarket.

EOP recently completed three new lease deals totaling more than 120,000 square feet at its 940,648-square-foot Wells Fargo Center in downtown Seattle. Included in those leases were long-term signings by Moss Adams LLP, the eleventh largest accounting and consulting firm in the country, for 64,513 square feet, and Free & Clear Inc. for 41,375 square feet.

Crown Realty & Development is moving forward with its plans for a 180,000-square-foot office project at the Xerox Centre in Santa Ana, California. Designed by Nadel Architects, the six-story Class A office building will be located in the central Orange County submarket directly adjacent to the 5 Freeway.

“The regional economy and concurrent restraint from the development community has paid off in a healthy, if not robust, leasing environment,” says Scott San Filippo, chief operating officer at Crown Realty & Development. “Ask any tenant looking for space today and you will find leasing rates have increased a full $0.10 per square foot since this same time last year, and landlords are less willing to talk concessions or large tenant improvement allowances. Vacancy rates have continued to drop, falling near or below 10 percent in the key submarkets including the John Wayne Airport/Irvine central business district and central Orange County.”

According to San Filippo, the Irvine, California-based company expects to break ground on the Santa Ana project in the second half of 2005 with completion set for 2006.

“The Irvine Company also recently tipped its hand, and, according to market reports, is planning on moving forward with 630,000 square feet [of construction] in two new Class A buildings at the Irvine Spectrum,” adds San Filippo. “Expect that other developers will be following suit soon.”

Orange County doesn’t miss out when C. Frederick Wehba ranks his top five western markets for Class A office investment. Chairman of BentleyForbes, a privately owned commercial real estate investment company based in Los Angeles, Wehba lists in order San Francisco, Century City in Los Angeles, Newport Beach in Orange County, followed by the downtown submarkets in San Diego and L.A.

“All of these markets share the positive fundamentals of California and are benefiting from positive absorption, barriers to entry and future job growth,” says Wehba. “In some of those top markets, mainly Century City and Newport Beach, available product is limited, further boosting the pricing of opportunities that do exist. Other western markets showing promise are the Phoenix central business district and Seattle, although we do not see nearly as many opportunities originating in these markets, nor the high barriers to entry or strong economic base that exists in the California metro markets.”

Wehba says the prime conditions in that Golden State group is obviously no secret, thus the reason why so much capital is chasing limited product. Investors will have to get used to 5 to 7 percent cap rates for top-quality assets and yields between 7 to 9 percent.

This year has been an opportunity for BentleyForbes to act as a net seller, taking profit to reapply into assets in markets where there are opportunities for upside or a strategic buying advantage. “We expect to close out the year as a net buyer following initial dispositions, targeting the addition of $750 million to $1 billion of office assets to our portfolio,” says Wehba. “After selling our 21st Century Plaza office campus located in the San Fernando Valley at the end of 2004, we made a strategic decision to invest in Class A office product in Dallas. We continue to review strategies relating to our portfolio of Class A office properties in Sacramento, a total of eight Class A suburban buildings with limited vacancy.”

Scottsdale, Arizona, is one of those non-California office markets that is humming with activity, and Opus West is there. In mid-2004, the full-service, Phoenix-based commercial real estate company broke ground on Opus Calendar Stick and Pima Center, which are located across the street from each other and adjacent to the Loop 101 freeway in Scottsdale.

“Scottsdale and northeast Phoenix have been magnets for corporate growth throughout the high and low points of the last decade,” says Thomas Roberts, president and CEO of Opus West.

Upon completion, the two projects will exceed 1.7 million square feet of prime office space in a market that has led metropolitan Phoenix in development and demand the last several years. Opus Calendar Stick’s four buildings will total 250,000 square feet; one building already was completed in February with two buildings to be delivered in July 2005 and the last in May 2006. Phoenix-based Butler Design Group is the project architect. Two phases of the 1.5 million-square-foot Pima Center are under construction: Phase I’s 133,000 square feet will be complete in October, and the 98,000-square-foot Phase II — also single-story — will be completed in November.

Opus Calendar Stick is the first privately developed commercial project to be built on Salt River Pima-Maricopa Indian Community (SRPMIC) land in a decade and required 5 years of groundwork before groundbreaking. Pima Center is located within the 209-acre Pima Center business park. Opus West is working with Phoenix-based MainSpring Capital Group, the developer of the Pima Center business park.

Opus West has its busy development hand in the Southern California office mix as well with its Opus Corporate Center at Valencia Gateway set for completion at the end of August. The $17 million, 162,000-square-foot complex consists of two three-story Class A office buildings located adjacent to the Valencia Country Club in Valencia, California. The center is currently 25 percent pre-leased.

In the high-growth Inland Empire market, Newport Beach, California-based Turner Development is developing more than 100,000 square feet of office space. Phase III of Turner Riverwalk or the “Riverwalk Office” will comprise 12 one-story buildings and one two-story 41,400-square-foot building in Riverside, California. Groundbreaking for the project took place at the end of March.

Located within a 73-acre mixed-use business community, the 1 million-square-foot Turner Riverwalk will be one of the largest master-planned business parks in the Inland Empire upon build out. The development is being designed by Irvine, California-based Ware Malcomb and built by Fullmer Construction.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.