On a gloomy Wednesday afternoon in an affluent part of Southern California, an excavator's claws sink into the face of a recently renovated, high-end office property, kicking off a demolition to make way for a warehouse.

The teardown in Santa Ana, one of the most populated cities in Orange County, is just one of many such conversion projects on the books across the country. That's because some investors are giving up hope for their office properties blighted with high vacancy since the start of the COVID-19 pandemic.

The Santa Ana office owners — Los Angeles-based Kearny Real Estate and New York-based Dune Real Estate Partners — plan to redevelop the 200,000-foot building rated Class A at 3100 S. Harbor Blvd. into a 163,000-square-foot industrial facility. Construction is expected to begin in coming weeks and wrap up later this year.

As for the site, "you couldn't draw it up any better for industrial," said Kearny Assistant Vice President Dan Broder.

Industrial is a popular choice for investors looking to convert existing office buildings into more in-demand uses, with e-commerce driving the need for last-mile logistics space across the United States. Orange County is one of the country's tightest industrial markets, with a 3.6% vacancy rate, well below the national average of 6%, according to CoStar data.

More than 15.2 million square feet of office space was converted into logistics use in 2023, according to Newmark and CoStar data. The total stock of U.S. industrial properties is growing at the fastest pace in more than three decades, according to CoStar.

Though demand has slowed for industrial space in recent years in light of higher interest rates, offices remain the hardest-hit property type in the wake of the pandemic. Low office attendance and slowed employment growth led to further occupancy losses and higher office vacancy in 2023, sending the national vacancy rate to a record high of 13.7%, according to CoStar.

"Though near-term recession fears have eased, and more organizations look set to enforce requirements for increased onsite work, the outlook for the year ahead remains dim," notes a CoStar analytics report.

Not all offices are contenders for an industrial conversion, or are even in need of one. New office projects designed with pandemic-era features, such as low-rise buildings and outdoor internet connectivity, have fared better in recent years. Elsewhere in the city of Irvine, the 1.1 million-square-foot Spectrum Terrace office campus is nearly fully occupied several months after the final phase wrapped construction.

Even so, Kearny executives blame the pandemic for why they needed to rethink the use of its Santa Ana office property.

The company that specializes in office and industrial assets in Southern California paid nearly $35 million for the two-building office property in 2018 and proceeded to sink millions of dollars of improvements into the site, upgrading an outdoor space, indoor and outdoor fitness facilities, an on-site cafe and a conference center.

Kearny finished upgrades and listed the property for lease in January 2020, just two months before the pandemic effectively shut the office sector and Kearny's chances at a successful lease up.

The company decided to pivot on the property last year by bringing on industrial developer Dune Real Estate as an investment partner.

The property was already zoned for industrial, making the city of Santa Ana a supporter of the plan. Broder noted industrial also makes sense because the site is surrounded by other low-rise industrial buildings that have found success in securing tenants due to their proximity to major highways in Orange County.

The industrial facility is expected to feature taller heights for tenants to store products along with 18 doors at loading dock height for cargo to facilitate distribution uses, truck parking with the potential for trailer storage, and a roughly 7,000-square-foot office.

The conversion of the property also signals a shift for Kearny; the Santa Ana property is the last office acquisition the company made before focusing on the industrial side of its business.

The office-to-industrial conversion is timed well as industrial demand has picked up in Orange County after slowing for most of 2023, according to Sean Ward, an executive vice president of CBRE who is marketing the future industrial space for lease.

Brokers expect the building to attract a diverse set of users due to its proximity to an attractive labor pool and homes, Ward said. Orange County's median home price topped $1 million in December 2023, reports indicate.

"It's all the reasons a company would want an industrial property there," Ward said.

Orange County's industrial market has softened along with the rest of the country in 2023, but tenant demand is expected to rebound this year due to growing e-commerce sales and rising imports to regional ports, according to Jesse Gundersheim, senior director of market analytics at CoStar Group's Orange County office.

Several offices are making way for industrial uses in Orange County, with one nearby property at 17300 Red Hill Ave. in Irvine slated to become a 156,000-square-foot industrial building.

While times and demand is changing, the Santa Ana property will still carry a piece of its office history with it, Broder said. Materials from the former office expected to be recycled to build the new industrial building.