Kearny to Flip a Recently Renovated SoCal Office Into a Warehouse

Asset management firm cites weakening office sector and scarcity of industrial development as reasons to transform the property

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How much is office down and warehouse up in Southern California? A developer and asset management firm announced Monday that it plans to demolish an office campus it spent millions renovating to make way for a new industrial facility in Orange County, Calif. 

Kearny Real Estate Company, in partnership with New York City-based Dune Real Estate Partners, said it will start building the 163,000-square-foot Harbor Logistics Center in the first quarter of 2024 after it razes the existing Elevate@Harbor office campus in Santa Ana, Calif. 

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The project is more evidence of the growing demand for industrial assets against a backdrop of a weakening post-pandemic office market. Santa Ana is also home to the two 13-story buildings that Blackstone notably sold at a 36 percent loss earlier this year.

Kearny acquired the 8-acre campus with two mid-rise offices at 3130 and 3100 South Harbor Boulevard in 2018 and completed a yearlong renovation. Then a global health crisis happened.

“We were well on our way to stabilizing the campus when the pandemic hit,” said Dan Broder, a Kearny assistant vice president who is managing the redevelopment. 

“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,” Broder added. “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.”

Indeed, work-from-home trends have pushed the Class A vacancy rate in Orange County to 16.3 percent after the first quarter this year, up 1.4 percentage points from 90 days earlier, according to CBRE (CBRE). Overall vacancy rates have shifted dramatically upward as well to 14.3 million square feet, the brokerage said.

Kearny also said a scarcity of developable land, particularly in Orange County, led to a severe undersupply of modern industrial space and a record-low vacancy in the region. Indeed, per CBRE, the 68 million-square-foot Greater Airport Area industrial submarket of Orange County where the property is located is experiencing a vacancy rate of 0.7 percent.

Kearny has developed and managed more than 12.5 million square feet of industrial product in Southern California and has $1.9 billion assets under management. The firm redeveloped the 2.6 million-square-foot Century Business Center for SpaceX in Hawthorne, and is fresh off a massive $325 million sale in the Inland Empire.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.