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Thursday, Mar 28, 2024
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Southern California Industrial Markets

The Orange County industrial market has illustrated the economic law of supply and demand, with demand far outweighing supply.

Tenants seeking space and investors seeking purchases are finding their side of the bargaining table more difficult. Leasing activity continues to rise and is expected to increase progressively into next year.

Asking rents have increased slightly due to the lack of quality space available on the market as well as the fact that there is limited new construction on the horizon for the lease product.

The overall vacancy rate in OC dropped 70 basis points to 4.4% from 5.1% the previous quarter. Net absorption in OC during the fourth quarter increased by more than 640,000 square feet compared to the third quarter.

Sale activity remains strong with no signs of slowing. The declining vacancy rate gives landlords the leverage to stay firm on their high asking rental rates and reduce concessions to the tenant.


Market Assessment

The manufacturing/distribution sector showed a marked improvement during the fourth quarter with 1.4 million square feet absorbed, an increase from the third quarter. In the standard industrial sector, the West and North County submarkets outperformed other submarkets.

The market was active on the leasing side compared to the same period a year ago. There was more than 1.8 million square feet of leasing activity during the fourth quarter.

Activity was strongest in the North and John Wayne Airport area submarkets with North County contributing 33% of the total leasing activity. Most of the fourth quarter’s leasing activity was in the 10,000- to 50,000-square-foot ranges.

Asking rental rates in the manufacturing/distribution sector increased from 70 cents to 75 cents per square foot, triple net, during the quarter.

The OC research and development sector bounced back in the fourth quarter. There was a total of 452,319 square feet absorbed compared to negative 23,320 square feet in the third quarter. This caused overall vacancy rates to decline from 5.5% to 4.9%.

Asking rental rates increased 3 cents from the third quarter.

Construction of R & D; buildings remained modest with 63,000 square feet under way in the West and North County submarkets.

Buildings for sale remained a hot item with the number of user sales increasing substantially. Demand was high for industrial product ranging from 7,500 to 28,000 square feet. There was more than 1.8 million square feet of deals during the fourth quarter. Average asking sale prices reached a staggering $160 per square foot.

Industrial space under construction in the fourth quarter totaled 790,080 square feet. The West County submarket accounted for the most space under construction with 460,495 square feet, followed by North County with 310,435 square feet.

The Los Angeles industrial market vacancy rate edged up slightly from 1.8% in the third quarter to end the year at 2%. The rise was due primarily to an increase in the number of projects coming on the market.

The industrial market recorded 1.1 million square feet of positive absorption for the fourth quarter, while net absorption for the year carried momentum from 2004 and posted 11 million square feet.

L.A. reigned as the tightest market in the nation throughout the year.

Sale and lease activity totaled about 13.2 million square feet this quarter. 2005 sale and lease activity reached 57.3 million, a gain of 7.4% versus 2004.

The user sales market maintained its robust pace, accounting for more than a quarter of total sale and lease activity this quarter. The volume of all sales (user and investment) for industrial products reached $2.5 billion during the year.

The median price per square foot climbed to $93, a gain of 18.5% over the previous year. Cap rates for investment products continued to drop, reaching an average of 6% in 2005.

Rents, on the other hand, increased 10% last year as demand continued to outstrip limited supply available.

Total construction projects completed this quarter surpassed an impressive 3.3 million square feet.


Market Assessment

After reaching an almost impossibly low 1%, Central L.A.’s vacancy rate inched up slightly to 1.3% in the fourth quarter.

Net absorption reached a negative 800,000 square feet during the fourth quarter as tenants seeking expansion simply could not find space in Central L.A. and were forced to relocate to other markets.

Industrial product continued to be converted into residential condos and lofts to capitalize on the continuing redevelopment of downtown. Sale and lease activity remained healthy, with more than 2.2 million square feet of transactions completed in the fourth quarter.

The amount of space under construction in the market remains minimal and rents have increased an impressive 11% during 2005. Vacancy rates likely will hover around 1% to 1.5% in 2006 as the local economy continues to prosper.

The Inland Empire’s industrial market underwent another record-setting year of widespread expansion.

2005 construction activity was up 48% from 2004, while the vacancy rate declined to 2.7% from 4.4% versus the same period. With demand clearly outpacing supply, 2005 proved to be a leasing market, comprising 625 of the 870 user transactions signed during the year.

Big-box development pushed east along the (I-10) Freeway from areas such as Fontana and Rialto, detouring south along the (I-215) Freeway to Moreno Valley, Perris and Riverside.

Infill development will become more prevalent in 2006, revitalizing older areas as newer markets experience building booms.


Market Assessment

During 2005, developers pushed east of the (I-15) Freeway. Cities such as Fontana, Rialto, Riverside and San Bernardino logged historical levels of construction activity to match the demands of companies in need of large blocks of space.

Construction activity was up 48% from last year, and nearly 20% of the nation’s speculative activity was in the region.

The year-end vacancy rate was 2.7% while annual absorption was up 3.6 million square feet. Asking rental rates increased 18%.

User sales were more plentiful in the closing months as buildings under 50,000 square feet became a hot item. Investor confidence did not relent, despite cap rates slipping south of 5%, while many investors purchased vacant, newly completed buildings.

Sale and leasing activity reached 36.1 million square feet for the year, a jump 31.3 million square feet a year earlier.

Proving to be a leasing market, 625 leases of the 870 user transactions in 2005 were leases, accounting for 28.4 million square feet. One hundred ninety of these 625 leases were for buildings in the 10,000- to 24,999-square-foot range as smaller companies.

Demand for larger warehouse space didn’t let up. There were 124 deals totaling 20.1 million square feet for space bigger than 100,000 square feet.

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