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Industrial’s Edge: Low Vacancies, Few Development Options

If you think it’s tough as an industrial tenant to find available space in Orange County, try being an industrial developer in the area, where opportunities are scarce, and the competition remains fierce.

“The only thing that seems to be curbing demand is a lack of options,” said Clyde Stauff, senior executive vice president at the Irvine office of commercial brokerage Colliers.

“There will never be enough supply to create an oversupply.”

Industrial vacancy in Orange County sits at 2.9%, hovering near historic lows, according to a quarterly market report by fellow brokerage Newmark Knight Frank.

Average asking rents reached a new high of $1.15 per square foot during the fourth quarter, the report said, with average annual gains of 9% over the last five years.

A lack of new supply is one reason for the tight market.

OC’s base of industrial buildings now stands at about 230 million square feet, and that base of buildings has shrunk by more than 15 million square feet over the past decade as older product has made way for residential development and other uses in infill areas.

Only a few projects are now in the works to add to the local total.

There’s just 1.2 million square feet of new product under construction in Orange County, spread across five infill developments, according to local brokerage data.

In comparison, some 23 million square feet of new space was built in the Inland Empire last year, while another 4.5 million was built in Los Angeles.

The largest area project now underway is Shea Business Center, a nearly 500,000-square-foot project on East Dyer Road in Santa Ana that should have no problem finding one or several tenants once it wraps, said Stauff.

“Strong market conditions and tight inventory have bolstered [transaction] activity, with a strong push to lease and buy real estate in Orange County,” said Troy Wooten, a senior managing director at the Irvine office of Newmark. “There’s been robust institutional investment locally, which I expect to continue for the foreseeable future.”

Giant in the Room

A notable local investor snagged many headlines and leases last year, and reinforced OC’s strong and growing positioning in the e-commerce game.

Seattle-based Amazon made a flurry of deals in 2019, increasing its portfolio from 450,000 square feet to 1.2 million square feet across multiple locations. Its aggressive stance in dealmaking left many others out of luck when searching for larger spots to lease.

“We’ve never seen anything like that,” said Stauff of the leasing velocity. “They’re paying premiums to appeal to local customers in strong markets.”

Another dizzying year isn’t expected; sources have said the recent push was part of an initiative by Amazon to expand in certain national markets, and that push has been largely filled for now.

The company’s deal to take all of 515 E. Dyer Road, a 414,000-square-foot facility in Santa Ana across the street from Shea Business Center, was among tops for the county last year.

It wasn’t the largest, though. The largest local deal of last year went to third-party logistics company Unis when it leased all of CenterPoint SoCal Logistics Center, a 1.1-million-square-foot industrial facility along Valley View Drive in Buena Park. About a quarter of the space there will be subleased to an affiliated business that offers a service akin to an office coworking firm, but for industrial space.

E-commerce is expected to drive further industrial growth in Orange County. Online sales are expected to grow at a projected compounded annual growth rate of 7% over the next five years.

“Appetites for last-mile logistics inventory remains strong, as the e-commerce industry expands,” the report said.

Another headline-making large lease in 2019 was also among tops for sales, when Albertsons Cos.’ sprawling Irvine distribution center, which includes the largest industrial building in South Orange County, traded hands in a sale-leaseback deal for about $278 million over the summer.

Strong Sales

That Irvine property is one of just four stand-alone industrial buildings in OC larger than 1 million square feet, according to CoStar Group Inc. records.

Each of the four buildings has changed hands since 2017, the latest being the $202 million sale for a 1.2 million-square-foot property in Fullerton long home to paper goods manufacturer Kimberly-Clark Corp.

It marked a growing sign of investment locally for Goodman North America, which operates out of Irvine. The company is working on a redevelopment plan for that site to create a new 1.5 million-square-foot logistics hub, which would be the largest industrial development project to break ground in Orange County in nearly seven years.

Kimberly-Clark cut about 90 positions at the Fullerton site at year’s end, in preparation for Goodman North American beginning redevelopment work there, state records show.

Fullerton’s been among OC’s best sources of business for industrial developers in recent years.

Newport Beach-based industrial developer Western Realco appeared to have no problem selling its Beckman Business Center, an eight-building, 1 million-square-foot project in Fullerton that brought in sales in excess of $190 million in late 2018 and early 2019.

San Francisco-based Prologis Inc., one of the buyers at Beckman, remains bullish on the local market.

Prologis paid about $124 million for the three largest buildings at the Fullerton development, and was also behind one of the more unique investment in Anaheim last year, paying $40 million for a 12-acre property previously home to a 144,214-square-foot showroom and warehouse used by Fry’s Electronics.

That space has since been snapped up by—you guessed it, Amazon.

Panattoni Push

Newport Beach-based Alere Property Group LLC, which spent north of $180 million in Orange County last year, and Panattoni Development Co. are other examples of industrial firms trying to stay active in the area.

“Recent purchases by firms such as these represent continued signs of strength for Orange County,” said Stauff.

Irvine-based Panattoni bought an existing building along Myford Avenue in Tustin used by an affiliate of AT&T Inc., as well as excess land at the site, for $32.4 million.

It has plans to build a new development at the 10-acre site.

“Finding deals in the area has been getting more and more difficult, but we are remaining active and looking for opportunities” to meet growing demand for manufacturing and last-mile distribution centers, Panattoni Partner Jacob LeBlanc previously told the Business Journal.

Scarce land availability may drive additional conversion projects such as this one, and Sares Regis’ industrial plans for former Boeing facilities it has bought in Huntington Beach the past few years.

“Available land throughout Southern California, and especially in Orange County, is nearly non-existent,” said Jon Pharris, president of industrial developer CapRock Partners. “The entire market is out of land and as a result, one option that has emerged is the redevelopment of non-functional and under-performing product into Class A industrial.”

“Developers are looking to convert a variety of product, and not just older industrial buildings.”

Compared to IE

Orange County’s industrial activity represents a fraction than that of the Inland Empire, which absorbs north of 25 million square feet per year, according to Stauff.

CapRock, active in both of these markets, notes that “net absorption may continue to decrease, as vacancy rates are near an all-time low and very little new supply is expected to be delivered in 2020,” said Pharris.

“Orange County is virtually at capacity until additional product is delivered.”

CapRock is currently under construction on more than 4 million square feet, including Colony Commerce Center in Ontario on behalf of Ivanhoe Cambridge, the largest speculative industrial project under construction in the nation.

“We continue to search for investment and development projects throughout the region and know we will be actively buying projects in Orange County throughout the coming year,” Pharris said.

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