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Commercial Real Estate

Flex Space Getting Harder to Fill

Vacancies are rising in Orange County at once-popular buildings that can be adapted for office or industrial use.

April 23, 2002|BOB HOWARD | SPECIAL TO THE TIMES

Low-rise office space in Orange County that was filling as fast as it was being built two years ago is now 30% vacant according to at least one study, saddling that segment of the office market with one of the highest vacancy rates in Southern California.

The low-rise, campus-style offices are known in real estate circles as flex office or flex-tech space because they consist of two-story concrete buildings that can readily be designed for either office or industrial use or a combination.

Flex-tech space was in such demand in 1999 and 2000 that some buildings commanded rents approaching those of prestigious marble-clad high-rises, up to $2.75 per square foot per month. Flex-tech rents have since plunged by half in some buildings and by 30% to 40% in most.

The reversal of fortunes, real estate observers say, reflects the economic slump, a slowdown among technology companies and zealous building by developers who rushed to meet demand that looked like it would never end.

"This is definitely the softest component in the office and industrial markets," said Royce Sharf, an office broker with Julien J. Studley Inc. "We're representing two companies who are looking for 50,000 square feet each, and we came up with 43 alternatives just in the airport area and South Orange County."

Real estate brokerages report significantly different totals of flex-tech space and vacancy rates because they don't agree on which buildings should be considered flex space. Reports on the size of the flex market range from about 10million to 16 million square feet, and vacancy numbers range from about 23% to more than 30%.

All of the reports, however, show that flex-tech space has suffered severely in the economic downturn.

Variety of Tenants

Filled Flex Office Space

Most of the flex space was built on a speculative basis, meaning developers had no tenants signed up when construction began but they expected to fill the buildings soon after construction was completed. Flex space looked more profitable for developers, Sharf said, because they could build it for about $140 to $175 per square foot, compared with about $250 to $275 per square foot for high-rise space.

Much of the flex-tech space was built in the second half of the 1990s, when the region's growing economy created demand for projects such as the 280,000-square-foot Gateway Inc. computers facility in Lake Forest.

About 200,000 square feet of the Gateway facility is available for sublease, said Sharf, the company's broker, who explained that the computer firm has consolidated many former Lake Forest operations into offices elsewhere.

Technology companies put the "tech" in flex-tech, but many other types of tenants also filled the flex offices, said Rich Elbaum, a spokesman for Irvine Co., Orange County's biggest builder of flex space.

Landlords are counting on those other types of tenants, such as insurance companies, engineering firms, medical products assemblers and distributors, marketing firms and other service companies, to take up the slack left by the still-stalled technology sector.

In the meantime, Irvine Co. has halted construction of flex space, as have other developers except for a few who are finishing projects that were started when demand was strong.

A 100,000-square-foot development in Lake Forest called Orchard Technology Park is scheduled to be finished this summer, said Andrei Olenicoff, a vice president at Newport Beach-based Olen Properties Corp., developer of the project.

Demand for flex space was robust when Olen bought the land for the development in August 2000, Olenicoff said, and the market still seemed relatively strong when the company obtained building permits a year ago.

"If the market had been where it is now, we might have held off [construction]," Olenicoff said, but he added that Olen believes its project will attract tenants.

"It combines industrial with office space," Olenicoff said. "I would not want to be building 100% flex office space."

The projects with the most empty space, Olenicoff explained, are the "pure office" flex buildings that have no industrial features, such as roll-up doors and loading docks. Olen, which owns about 4million square feet of commercial buildings in Orange County, is getting higher rents in its combination office and industrial buildings than it is in those that are 100% office space.

Olen's new project will target users who want up to 50% office space with their industrial buildings. Its five buildings are designed to be leased to smaller tenants--those requiring 1,000 to 4,000 square feet of combined office and industrial space.

Long-Term Outlook Good for Flex Space

Elbaum and Sharf said prospective tenants have shown increased interest in flex office space in recent months.

The long-term outlook for flex space is good, many in the industry say, because it will be attractive when the economy recovers and businesses begin expanding.

Triple Net Properties of Santa Ana showed its confidence in the flex office market recently when it paid nearly $24 million for the 167,585-square-foot Pacific Corporate Park in Lake Forest.

The project was 78% occupied at the time of the purchase, but Triple Net has since signed one tenant that boosted occupancy to 82% and has a letter of intent from another that will push occupancy to approximately 88%, said Tony Thompson, Triple Net's president and chief executive.

For many developers and investors, however, flex space is taking much longer to fill than it did when they started or bought their projects.

Now, brokers say, filling the empty space could take two to three years.

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