It may be gradual, but Orange County’s industrial market is shifting.
The change is a result of what the county stopped losing, rather than what it’s gained: jobs.
OC stopped hemorrhaging manufacturing workers last year, and this year is set to add nearly 3,000 workers in the sector for a 1.6% gain, according to forecasters at Chapman University.
Meanwhile, construction of industrial space has been limited to small buildings for sale as well as larger complexes built for specific manufacturers or companies storing or distributing products here. There has been little speculative development.
The result: Vacancies are down. The average industrial vacancy dipped to 4% in the fourth quarter, down from 4.8% in the third quarter and 5.7% a year ago,
according to CB Richard Ellis Group Inc.
“2004 was awesome,” said Jerry Holdner, vice president of market research with Voit Commercial Brokerage LLP in Anaheim.
He cited a record level of absorption last year,4.3 million square feet,meaning much more space was occupied via leases and sales than vacated by companies leaving.
Holdner said industrial rental rates should shoot up 7% to 10% this year. In 2004, the average rate for pure industrial space rose 11.5% to 58 cents per square foot per month, according to Voit.
The market has turned a corner, Holdner said, but it’s a short-term thing. In the long run, the trend of taking older industrial sites and transforming them into housing or offices is sure to continue, he said.
Brokers tend to agree, though they say Orange County will have a sizeable industrial market for some time.
There is 300 million square feet of industrial buildings in the county, about three times the square footage of office buildings, according to Voit.
Chuck Noble, who heads Lee & Associates’ Orange office, said OC is a maturing market where companies will continue to buy, sell and lease existing buildings, but new development will be limited.
Noble said the redevelopment of former military bases in Irvine and Tustin mark a turning point.
“Those are the last two remaining areas where there will be sizeable development,” Noble said.
He expects developers to focus on redoing older industrial sites,a trend that has been going on for some time.
Irvine has zoned the former El Toro Marine base for about 3 million square feet of commercial development, including some industrial. Tustin still is hammering out the details for its former Marine base. There’s also potential for some industrial in Irvine’s massive Northern Sphere development and also in South County’s Rancho Mission Viejo plan.
Now that El Toro is just about guaranteed not to become an airport, much of the land around it is being rezoned from commercial to residential. The hot housing market has developers with projects in Irvine and Lake Forest salivating over the prospect of building homes and apartments near the base.
Still, industrial construction is far from dead in OC. There are a few big existing sites for industrial development, including The Irvine Company’s Irvine Spectrum and industrial zones in several cities.
There was 1 million square feet of industrial space under construction in the fourth quarter, about 20% more than the third quarter and nearly double the year ago total, according to Voit.
Most activity has been small buildings for sale. Even among buildings for lease, projects are getting smaller, according to Voit’s Holdner.
A good example is what happened to the former campus of furniture maker Steelcase Inc. in Tustin, Holdner said. After the furniture maker left for Industry in 2002, Voit Development Co. razed half the building to put up 19 buildings for sale.
The buildings are set to range from 3,900 to 38,000 square feet. Now known as Tustin Gateway Business Park, the development at Warner and Bell avenues is set to total 265,000 square feet.
Voit sold the other 500,000 square feet of Steelcase’s building to Fresno-based tile and counter top maker Bedrosians.
Bedrosians turned around and leased 220,543 square feet of the building to Ricoh Electronics Inc.
Rob Guthrie, who runs Laguna Hills-based industrial developer Guthrie Development Co., said the trend from big to small fits with the county’s maturity and the rising cost of doing business in OC.
He said Fortune 500-sized companies are moving their industrial operations to cheaper markets. Smaller companies, often ones that make more expensive products, are replacing them, he said.
Guthrie said he’s building fewer small buildings for sale and focusing more on leased properties. In 2002, small buildings for sale accounted for nearly all his business. Now they’re closer to 50% and he plans to drop them down to 25%.
The reason: interest rates are on the rise.
In past rate-tightening cycles, the market-moving Federal Funds Rate shot up an average of 2.8 percentage points in 15.3 months, according to Chapman’s A. Gary Anderson Center for Economic Research.
Rates rose 1.25 percentage points last year. What if they continue rising to the cycle average?
“I think that will be enough to slow down the velocity of these buildings for sale,” Guthrie said.
