The economic downtrend continues to stress the nation’s financial market as well as the local business environment. The ripple effect of the current economic situation has also touched the Orange County industrial market. At the close of the third quarter, the market posted negative 1.6 million square feet of absorption countywide, the lowest seen since the fourth quarter of 2001.
The effects of reduced consumer spending and an increasingly volatile credit market have forced many companies to curtail expansion and relocation plans, choosing instead to consolidate to save costs. During the past year, gross activity has seen subtle losses each quarter, but continues to record activity larger than 2 million square feet. A significant number of transactions in the third quarter found tenants opting to use a “wait and see” approach by renewing existing leases. Furthermore, a considerable number of available properties with extended time on the market recently became vacant.
This is not to say that deals are not getting done, as demonstrated by the recent relocation of Eaton Aerospace, part of Eaton Corp., whose 140,630-square-foot lease in the Irvine Spectrum was the largest of the quarter. Also in South County, a 73,742-square-foot industrial sale at 2 Orion in Aliso Viejo reinforces the importance of OC’s location and highly sought after industrial buildings.
Demand for manufacturing and warehouse space continues to wane. All submarkets, excluding South County, posted negative absorption. The airport area’s negative 757,697 square feet was the result of several buildings becoming vacant, the majority of them smaller than 50,000 square feet. Countywide, research and development posted only a minor loss of 31,095 square feet of negative absorption.
Overall, asking lease rates continued to hold despite a decline in the airport area. The county’s manufacturing and warehouse properties ask on average 68 cents per square foot, while research and development properties average $1.08 per square foot. The largest asking rent reduction occurred in the airport area, where lease rates for the manufacturing and warehouse and research and development sectors slid 4 cents to 79 cents and $1.09, respectively.
Net Absorption
Net absorption for the third quarter reached a countywide total of negative 1.6 million square feet, with the largest amount occurring in the airport area, at negative 1 million square feet. Manufacturing and warehouse space was almost exclusively responsible for the negative absorption as research and development buildings posted negative 31,095 square feet of absorption.
Increased vacancy can be attributed to a number of new properties coming onto the market, coupled with a weakening economy and decreased business expansions; available sublease space also continues to increase. Gross activity remains relatively stable at 2.1 million square feet, highlighting the strong fundamentals of OC industrial buildings. One of the largest leases last quarter occurred at 9650 Jeronimo in the Irvine Spectrum, where 140,630 square feet of research and development space was leased.
Vacancy, Availability, Rates
OC’s availability rate rose significantly from 6.8% in the second quarter to 7.5%. Manufacturing and warehouse space led the rise in availability to 7.4%, up from 6.6%. The re-search and development sector maintains a 7.9% availability rate for the second consecutive quarter.
The combined percentage of vacancy for all industrial space increased to 3.8%, up from 3.1%. Manufacturing and warehouse buildings saw the largest vacancy gain, climbing 80 basis points to 3.9%, while the research and development market inched higher to 3.1%. Of the submarkets, the airport area saw the most significant increase in vacant space from 2.4% in the second quarter to 3.9%.
Overall OC asking rents remain solid at 75 cents per square foot. Most submarkets retained their previous quarter’s rents, while the airport area saw a noticeable drop. Manufacturing and warehouse space in the airport area fell 4 cents to 79 cents.
Construction
Industrial construction continues unchanged from the second quarter. No new construction starts occurred while the majority of projects are expected to be completed by year’s end. In Fullerton, Kimberly Business Park is nearing completion and will add 207,265 square feet to the industrial base to North County. Construction in the airport area totals 23,608 square feet and South County has one 14,507-square-foot building in the development phase. Total OC industrial existing inventory now stands at more than 247 million square feet.
Analysis by CB Richard Ellis Group Inc.
