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REAL ESTATE WATCH: North & Central Orange County

Real estate is always a function of supply and demand.

The current decline in North and Central County industrial real estate prices and the continued stagnation in the general economy have put us in a demand recession.

Fortunately, the supply has not increased at the same rate as we saw in previous recessions, which, if current levels remain, will bode for a quick recovery when the economy and the industrial real estate market improves.

Until this occurs, the limited amount of demand will fill the vacant buildings at low rental rates.

At the close of the third quarter, the Orange County industrial market reported slightly higher activity than in the second quarter.

The North County submarket posted the highest amount of activity with 823,704 square feet.

Despite this positive news, the North and Central County markets saw vacancy and availability rates increase, while average asking lease rates and sales prices declined.

The vacancy rates increased to 5.5%, and availability rates climbed to 10.2%. The average asking lease rate decreased by 2 cents to 54 cents per square foot per month. The average asking sale price also declined to $145.37 per square foot.

In November, California’s unemployment rate reached 12.3%, tying for the third highest in the country. OC’s unemployment rate was 9.4%, slightly below the 10% national average.

While the latest numbers show a slight improvement in jobs, construction and manufacturing sectors were still hard hit, which is not positive news for industrial real estate demand.

Leasing Demand

This lack of demand has created a competitive environment for landlords when it comes to attracting and retaining tenants. The longer a property sits on the market, the more aggressive landlords become in their efforts to fill empty buildings.

Concerns over the low level of leasing demand are also giving investors yet another reason—along with capital market woes—to stay on the sidelines.

Underwriting on current market rents, which are down 15% to 20%, has created significant downward pressure on investment values.

The bright spot in the market is the activity among owner/user buyers. Though pricing levels have fallen 20% to 30% from the peak of 2007, there are a number of transactions expected to close escrow in late 2009 and the first quarter.

This trend is a welcome sign in light of the overall drop off in demand in the marketplace.

Seybold is senior vice president in the Anaheim office of CB Richard Ellis Group Inc.

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