The Orange County industrial market posted its most promising year since the start of the millennium, with consistently strong levels of activity and tightening vacancy rates.
Although not as dramatic as other quarters last year, the fourth quarter showed that Orange County’s industrial market is recording a strong recovery.
The recovering manufacturing sector in Orange County mirrors the rest of the country, bringing new jobs and demand for industrial space. That’s contributed to the highest annual level of net absorption in four years for the county’s manufacturing and warehouse market.
The research and development sector saw its highest annual level in six years in the fourth quarter.
The resiliency of Orange County’s economy led to 1 million square feet of positive industrial net absorption in the fourth quarter. For the first time since the end of 2000, the county’s industrial market recorded four consecutive quarters of positive net absorption, bringing the total figure for 2004 to more than 3.1 million square feet.
Positive absorption further tightened the county’s vacancy rate, which dropped to 4% in the fourth quarter. Total activity in 2004 was 18.4 million square feet, a 27.1% jump from last year.
Net Absorption
The fourth quarter saw healthy demand for industrial space, with continued signs of a manufacturing recovery in Orange County helping out.
Industrial net absorption reached 1 million square feet in the quarter, representing a 79.1% increase from the previous quarter.
The R & D; market ended its three-quarter winning streak by posting negative 11,244 square feet of net absorption. In contrast, the M & W; sector broke 1 million square feet of positive net absorption for the first time since the fourth quarter of 2000.
Vacancy
Four straight quarters of positive absorption in 2004 helped push the amount of vacant industrial space in Orange County below 10 million square feet for the first time since the third quarter of 2002.
The M & W; market has seen its vacancy rate decline for four consecutive quarters, down to 3.9% in the fourth quarter.
Countywide, the R & D; market saw no change in vacancy at 4.6%. Despite slight declines in gross industrial activity, the airport area and North County posted declines in vacancy to 3.8% and 4.1%, respectively.
Lease Rates
The average asking lease rate for Orange County industrial space in the fourth quarter rose by one cent to 60 cents per square foot,the average rate for the past four years.
Asking rates for M & W; buildings in the county grew by two cents per square foot while R & D; buildings remained unchanged at 79 cents per square foot.
Aside from the airport area, which held steady at 63 cents per square foot, every local market area witnessed an increase in average industrial lease rates.
Construction
Seven projects broke ground in the fourth quarter, including six totaling 229,223 square feet in West County. Although the amount of construction in the airport area remained constant in the fourth quarter, it still ranks first at more than 359,000 square feet.
Almost 60% of the total construction activity in the county was seen in the M & W; sector, while one 60,000-square-foot project broke ground in R & D.;
With one industrial building completing construction in the fourth quarter, the total amount of industrial space completed last year was about 787,000 square feet.
ORANGE COUNTY
Strong demand for buying buildings, little construction and a diverse tenant pool kept Orange County’s industrial market from giving up ground last year.
Small buildings for sale fueled the market’s health. However, continued cautiousness among larger tenants resulted in a soft leasing market for Orange County.
The average vacancy rate went down slightly and average asking rates were flat last year. High costs and anemic employment have kept large industrial users from expanding. Yet there was a small drop in the vacancy rate from one year earlier.
Small increases in asking rates were seen in isolated instances. But for the most part, landlords refused to raise the price of leasing space. The R & D; market fueled most of the activity, accounting for a significant amount of countywide net absorption.
Construction in Orange County has been at its lowest level in years, creating a fixed supply of available space that slowly is being eaten away.
This will lead to a moderate increase in asking rates over the first half of 2005, with some areas such as the Irvine Business Complex in the airport submarket expecting sharper increases in asking rates.
Sale activity remained strong for Orange County last year, accounting for more than 40% of all transactions. High sale activity was driven by low interest rates, which facilitated financing for small users.
In the coming year, we can expect to see continued interest in buying as long as interest rates remain low and rise slowly.
Another factor driving this trend is the lack of new space being built. Construction levels are the lowest they have been in years due to the increased cost of raw materials and land.
Some have estimated these costs rose as much as 20% in the latter half of 2004. The lack of construction will be carried into 2005, further fueling strong demand.
Another important trend to watch for is the renovation of large warehouse space to create smaller condominium units for sale. This is a trend that has started in the John Wayne Airport area where available land is scarce and expensive.
Expect to see more of these projects in the first half of the year as developers realize the benefits of converting older buildings into new smaller space.
Increased lease and sale activity can be expected to pick up steam in 2005. As confidence in a strong economy builds, companies will fuel expansion into industrial space.
The R & D; sector will be expected to spearhead this upturn just as it did last year. On the sale side, small buildings for sale will remain a vital component to the overall health of the industrial market in Orange County, especially in the southern part of the county where leasing activity has been the softest.
LOS ANGELES
Los Angeles County’s industrial market showed signs of renewed stability in 2004. Rents were up 6% from the previous year. The market posted more than 53 million square feet of sale and lease activity, a 20% increase from a year ago.
With close to 1 billion square feet of space and a 2.7% vacancy rate,the lowest in the nation,this market, which is devoid of any significantly large parcels of land for industrial development, will be challenged this year.
As the economy improves, upward pressure on interest rates will cool sale activity, but sale prices will hold steady. Lease rates will increase as the demand for leasing versus buying takes hold.
Even though interest rates are expected to climb moderately this year, demand for smaller industrial buildings for sale will remain strong as long as interest rates remain low enough that tenants are encouraged to own rather than lease.
But will there be enough supply? The amount of construction in Los Angeles County has declined since 2003, in part a direct result of the land shortage. Competition is intense with commercial developers as well as residential developers vying for any scarce parcels.
The market will continue to lose industrial land to residential developers. Although the demand for buildings for sale will continue this year, the leasing market will drive much of the activity.
In 2005, more companies will consider an expansion or relocation.
Mid-Cities
Vacancy in the Mid-Cities market has been dropping since the second quarter of 2003. With its strategic location along the Los Angeles/Orange County border, access to the ports and diversified list of tenants, the Mid-Cities will continue to be one of the most attractive markets in Los Angeles County this year.
This market claims the highest concentration of institutional owners in Southern California. Institutional owners will continue to see the Mid-Cities as a prime market for long-term investment because of its strategic location.
Like other markets in Los Angeles County, the Mid-Cities market will experience an increase in leasing activity and a gradual increase in lease rates.
South Bay
The South Bay recorded the highest volume of sale and lease activity in Los Angeles County last year with the vacancy rate hitting an unprecedented low of 2.7%.
The South Bay is home to the Los Angeles and Long Beach ports,the nation’s busiest. The two ports together account for 36% of all U.S. trade, and this volume is expected to double in the next 10 years.
Grubb & Ellis’ World Ports Industrial Market Report forecasts an impending shortage of class A industrial space and a waning supply of class B space.
Construction of class A buildings will not be adequate to meet accelerating demand. Although a few buildings are planned to start construction, a shortage of land sites will severely limit supply. Future construction will be based solely on infill development with increasing rents the norm.
INLAND EMPIRE
The Inland Empire continued a marketwide expansion last year as developers pushed into cities east of I-15 and along the I-215 corridor. With shrinking vacancy rates, asking rents modestly increasing and construction up nearly 25% from last year, the region maintained a healthy vitality.
Annual sale and leasing activity last year was on par with 2003. The epicenter was in cities west of I-15,Ontario, Rancho Cucamonga, Chino and Fontana, in which small to midsize buildings 10,000 to 75,000 square feet posted the most activity.
The vacancy rate at the end of the year was 4.5%, a big drop from 2003’s 6.9%. Asking rental rates for warehouse/distribution space and R & D;/flex increased, building on momentum stemming from 2003.
Investor confidence was robust last year, leading to the purchase of several vacant warehouses by local and national interests.
These trends will remain stable in 2005, supported by steady demand. Of the 13 million square feet of speculative buildings completed last year, 50% has been absorbed.
With a shortage of larger land parcels in the west, warehouse development is expected to erupt east on the I-10 and north on the I-215. The cities of Moreno Valley, Riverside and San Bernardino will be the hotspots for logistic-minded companies looking for less expensive, plentiful land.
Owner-built and build-to-suit projects will become more common early this year as companies customize their operations to process imported goods from Mexico and overseas.
With high demand chasing a limited pool of space, activity from Los Angeles County’s industrial market will shift even further into the Inland Empire.
Some 13.1 million cargo containers from nearby ports moved through the region last year, an 11% increase from 2003.
With cargo expected to triple in the next 20 years, the number of trains moving through the Inland Empire is predicted to rise from 69 to 161 per day during the period; the area will need to quintuple its rail lines in some areas to meet future cargo demand.
To ease rail congestion, an inland port may come to the San Gorgonio Pass between Beaumont and Cabazon. With large chunks of affordable land and highway access, the region and its rail lines will compete with other inland areas including Victor Valley and Devore.
An inland port would help consolidate traffic from smaller rail yards in San Bernardino, Colton, Victorville and Fontana while reducing truck traffic from Los Angeles to Riverside and San Bernardino counties.
Dismayed by expensive fuel, low pay, scarce benefits and government regulation, 40,000 U.S. truck drivers quit the profession in 2003; the industry needs 80,000 new professionals each year to meet demand.
This gap will be filled once a unanimous Supreme Court ruling goes into effect allowing Mexican trucks full access to the U.S. As many as 34,000 Mexican trucks could operate in the U.S.
