A newly renovated office campus in Santa Ana will make way for an industrial project spanning 163,000 square feet following a recapitalization deal totaling $49 million, property records indicate.
Los Angeles-based Kearny Real Estate Co. and Dune Real Estate Partners are planning a redevelopment of Elevate @ Harbor, a two-building, 197,370-square-foot office at 3100-3130 S. Harbor Blvd., near the San Diego (405) Freeway.
Harbor Logistics Center is the largest new industrial project on the books for Santa Ana, according to a market report from CBRE; the city does not currently have any industrial projects under construction.
Construction on the 8.3-acre site is expected to kick off in the first quarter of 2024.
Kearny Real Estate acquired the two-building office campus in 2018 for $34.8 million, before investing in a multimillion-dollar renovation and rebranding effort that added outdoor amenity space, an upgraded fitness facility, on-site café, conference center and nearly one acre of open space.
It returned the project to the market in 2019, then the pandemic hit, which effectively shuttered the office market and shifted the landlord’s plans for the property.
“We were well on our way to stabilizing the campus when the pandemic hit,” Kearny Assistant Vice President Dan Broder said.
“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.”
It brought on Dune Real Estate as an investment partner in February; their $49 million recapitalization deal works out to nearly $255 per square foot or nearly $6 million per acre.
That’s roughly in line with the $6.3 million per acre that Rexford Industrial Realty Inc. (NYSE: REXR) paid for the Fox Racing headquarters in Irvine in January. Rexford plans to turn Fox’s creative office site near Jamboree Road into an industrial project once its lease expires in 2027.
The largest office tenant at Elevate is Optima Tax Relief, which takes north of 90,000 square feet across both buildings.
Office vs. Industrial
Elevate @ Harbor is the latest local office to serve as a land play for industrial developers, as the office market continues to struggle with high vacancy rates, while industrial demand outstrips other property types.
The greater airport submarket, which includes the Harbor site, counts a vacancy rate of 0.7%, with leasing rates up 18% from the year prior, according to a CBRE report.
Compare that with the office sector for the same area, which is currently hovering around 15% vacancy.
“When completed in 2025, the new facility will be a welcome relief for local companies that are struggling to find industrial space in such a tight market,” Kearny’s Broder said.
The Santa Ana project will include 36’ clear heights, 17 dock high doors and truck parking with the potential for trailer storage, as well as 7,000 square feet of office space. The property is already zoned for industrial use, Broder notes.
“The city of Santa Ana has been very supportive of our plans,” Broder said. “We anticipate a smooth approval process and look forward bringing a well located modern industrial product to a market experiencing an extreme lack of supply.”
Kearny has developed and managed more than 12.5 million square feet of industrial product in Southern California, including two Class A projects totaling 1.2 million square feet that recently delivered in Torrance and Corona.
The company is also behind the redevelopment of the 2.6 million-square-foot Century Business Center in Hawthorne, Los Angeles, which is home to Elon Musk’s SpaceX headquarters, and is the master developer of the 311-acre Otay Crossings Commerce Park, one of the largest master-planned industrial developments in San Diego.
In Orange County, Kearny previously owned the former Los Angeles Times printing press property in Costa Mesa; it sold that property in 2017 for $65 million to Foster City-based SteelWave LLC and Invesco.
The new owners are currently wrapping the redevelopment of the site into The Press, an office and R&D campus that will span 640,000 square feet at completion. It serves as the headquarters for Anduril Industries.
“We believe strongly in the industrial fundamentals of Orange County,” Aaron Greeno, Dune Real Estate Partner’s head of West Coast, said.
New industrial development dropped once again in Orange County during the first quarter, with 2.7 million square feet underway across the region, according to CBRE.
Attributing to the decrease was the delivery of the final phase of the Goodman Logistics Center in Fullerton, now fully leased by three tenants: Sprouts, Bandai Namco and Samsung.
Replacing that project as the largest industrial development under construction in the region is Sares-Regis’ Huntington Gateway Project in Surf City, which totals 1.2 million square feet over six buildings.
Eight new projects broke ground during the first quarter, bringing OC’s construction total to 2.7 million square feet across 23 buildings.
“Strong tenant demand is likely to keep net absorption positive in the short term,” the CBRE report said. “However, due to lack of available space we could see net new activity start to decrease as tenants and landlords will grow more creative in how they grow their respective portfolios.”