With absorption for two consecutive quarters, the Orange County industrial market appears to be on the upswing at long last.
Though market challenges persist, activity improved in the second quarter as landlords offered attractive lease packages and tenants took advantage of the opportunities to lock in longer term deals at competitive rates.
Activity in the second quarter was on par with that of the first quarter at 3.1 million square feet, although absorption was roughly 35% lower in the second quarter with 701,921 square feet of absorbed space.
Overall, the uptick in activity levels compared to 2009 is creating a sense of renewed optimism in the market, which should continue to aid in the market recovery through the rest of 2010.
Stronger activity levels are attributed to the continual decline in lease rates and sale prices through the second quarter. The average asking lease rate decreased nominally to 58 cents per square foot, down 1 cent from the first quarter.
Similarly, average asking sale prices continue to drop as supply and demand factors require sellers to remain competitive with their pricing. In the second quarter, sale prices were reduced by nearly $6 per square foot from the previous quarter, averaging a price per square foot of $129.43.
As lease rates and sale prices dropped in OC, so did the industrial vacancy rate in the second quarter. The overall county vacancy rate stands at 4.4%, down from 4.7% in the first quarter.
West County experienced the lowest vacancy rate at 3.7%, while the airport area exhibited the highest rate at 4.6%. Manufacturing and warehouse space represented more than 94% of the total absorbed space, which may be partially attributed to increased activity at the Ports of Los Angeles and Long Beach.
Changes in gross activity remained relatively stable from the first to second quarter, resulting in less than a 2% decrease. Second quarter posted 3.1 million square feet of activity, showing strength in the North County market, which accounted for more than 60% of total activity. The largest transaction in the second quarter was a 246,732-square-foot user sale in the city of Orange.
Although second quarter absorption was lower than the previous quarter—which marked more than 1 million square feet of absorbed space—the continuation of positive numbers demonstrates signs of a strengthening market.
That didn’t translate to availability, which continued to increase, up 2% from the first quarter, marking the 15th consecutive quarter of rising availability.
A total of about 4.3 million square feet of newly available industrial space hit the market during the second quarter, increasing the availability rate to 11.2%. North County had the highest amount of availability, recording 10.4 million square feet of available space.
While availability continues to increase, market indicators suggest that a peak in the availability rate is near and we will begin to see some recovery before the end of the year.
Average asking lease rates remained relatively stable, falling only 1 cent to 58 cents across OC. Manufacturing and warehouse and research and development space both experienced a 2 cent decrease.
Since rates peaked at the height of the market in 2008 at 78 cents, the county has experienced an estimated 26% drop in average asking lease rates.
Leveling Off
Although rates continue to drop, the average rate of reduction on a residual basis is showing signs of stabilization.
That could be attributed in part to a reduction in new space.
Construction activity leveled off in the second quarter. North County remains the only submarket with space under construc-tion, totaling 496,921 square feet in Ana- heim. Three of the four buildings under construction are at the Canyon Point Business Park.
Since the start of the recession, the market has experienced insignificant changes in construction and this is expected to continue.
Data and analysis by CB Richard Ellis Group Inc.
