Office-To-Industrial Projects Plow On In SoCal Despite Obstacles, Shifting Market

With a crop of empty and underused office buildings and a persistently tight industrial market, investors are pushing forward with plans to convert office properties to industrial in SoCal.

A flurry of these projects blew through Orange County in 2021, and the trend seems to have caught on in other parts of SoCal. As with most conversion projects, though, owners embarking on office-to-industrial renovations have to jump hurdles, including zoning challenges, picky neighbors and office tenants staying put. But the projects are still desirable for those companies that can find solutions.

“Industrial buyers are interested in the office-to-industrial conversion anywhere the zoning permits and where there's a relative cost basis that makes sense to go forward with a new industrial development,” CBRE Senior Vice President James Hooks said. 

The Orange County industrial market's total vacancy remained the lowest in SoCal at 2.8% in the fourth quarter as it saw asking rents plateau at record highs, according to a JLL report. Meanwhile, the office market in Orange County carried an availability rate of 23% in Q1, according to a Savills report. 

In the South Bay, where Hooks specializes, Atlas Capital is nearly finished with an office-to-industrial outdoor storage project replacing a single-story office complex. It purchased the property in 2022 with eyes on an industrial use for the site. The outdoor storage will be complete by June, said Hooks, who is marketing the property for lease.  

The offices on-site were a “C building during the good times and an unleasable project during the worst times,” he said. Now, it’s going to be a sought-after trailer yard near a top port. 

But for some developers, getting conversions underway includes a waiting game. 

At two would-be office-to-industrial projects, both owned by Rexford Industrial Realty, office tenants are still in place. So, the owner and developer has yet to turn those properties into industrial buildings. 

“We're kind of focused on the income in place from those tenants,” Rexford Chief Investment Officer Patrick Schlehuber said. 

Rexford purchased a property at 16752 Armstrong Ave. in Irvine in early 2023, another office property that will eventually become industrial. It would be a return to the sector, as Schlehuber said the property was built as a warehouse, then converted to creative offices when that was trendy.

This property also has a long-term tenant, sports equipment company Fox Racing, that not only doesn’t plan to leave but is considering expanding. Schlehuber said he isn't worried about it. 

“We like the cash flow — that's really what we're focused on, is collecting cash flow for our shareholders,” Schlehuber said. 

Developers also need to either find buildings with the proper zoning or be prepared to do the work — and spend the money — to change zoning.

Scannell Properties had “favorable zoning” and support from the city for an office-to-industrial conversion it is working on in Garden Grove. What was a two-building office property will become a roughly 90K SF warehouse and distribution facility. But not all owners are as lucky, Scannell Director of Development Jay Tanjuan said.

Even properties that have industrial zoning sometimes must combat negative community sentiment about industrial properties in general, like a spate of rejections last year in the famously industrial-friendly Inland Empire. 

The office-to-industrial concept isn’t new, Hooks said, pointing to Sares Regis Group’s purchase of the former Toyota headquarters in Torrance for industrial uses. But its popularity has increased because the values of many office buildings have eroded.

With the industrial market slowing down from the record highs of 2021 and 2022, there may still be some pauses or pivots as developers recalibrate and reassess what tenants want. 

“Tenant demand kind of ebbs and flows,” Tanjuan said. “What can be favored today may not be the favored size range two or three years from now, when the project's ready to be delivered.”