The Orange County industrial market had another strong showing in 2006.
The outlook for OC is increasing job growth, declining vacancy rates, rising rents and significant demand for industrial space. With limited new construction of just 998,530 square feet in the county, tenants and investors are competing for a select few properties.
All submarkets experienced positive net absorption in 2006 and asking rents for all properties increased 0.02% to 87 cents, triple net, from 85 cents, triple net, in the third quarter.
Demand rose well above forecasts for the year, causing a shortage of available space. As a result, asking lease rates and sale prices escalated, and space was absorbed upon entering the market.
OC is set to see continued strength as developers,short on land,turn to urban infill and redevelopment projects.
The market posted a 3.5% vacancy rate in the fourth quarter, a slight decrease from the third quarter’s 3.8%. Industrial space is being absorbed at a steady and healthy pace. For the fourth quarter, net absorption totaled more than 1.1 million square feet.
Orange County construction activity increased marginally during the fourth quarter. The amount of industrial product under construction totaled 998,530 square feet. Construction activity for the fourth quarter is up 20% from one year ago. More than 1 million square feet of space currently is planned or under development as of the first quarter of this year.
Market Assessment
Sales and leases in OC’s industrial market totaled more than 5 million square feet in the fourth quarter.
Sales accounted for 48% of the total, or 2.4 million square feet, and leases for 52%, or 2.6 million square feet.
This activity level, which is down 30% from the fourth quarter of 2005, brought the year-to-date total to almost 19.8 million square feet, below 2005’s year-end total.
Available space has been dramatically reduced in the county during the past several years. Industrial vacancy has decreased by more than 35% since the fourth quarter of 2004,when it was 5.4%,to the current level of 3.5%.
North County had the bulk of industrial sales and leases in the fourth quarter, with a total of more than 1.9 million square feet. As a result, the vacancy rate dropped to 2.5%. The airport area had 5.8 million square feet of industrial activity in the fourth quarter, dropping the rate of available space there to 4.4%,the lowest rate of the OC submarkets.
The West County industrial market continues to see significant amounts of development and increasing vacancy rates. At the end of the fourth quarter, the vacancy rate stood at 5.1%. This is up from 4.2% at the end of 2005.
There’s currently another 500,000 square feet of space under construction in West County. West County’s asking lease rate also is relatively low at 75 cents per square foot. It is difficult to determine whether this market is becoming overbuilt. By the end of this year, West County is expected to see available rates at 6.7%.
Overton Moore Properties bought the 44-acre site at Seal Beach Boulevard and Westminster Avenue from Boeing Co., and is wrapping up its first phase of construction on Gateway Business Center, a 10-building 830,000-square-foot masterplanned industrial and office business park.
These corridors will increase the accessibility of OC to the Los Angeles and Long Beach ports tremendously.
As we head into 2007, investors and users will find quality projects. Developments by Co.,the 170,496-square-foot industrial condo project, Goodyear Business Park in Irvine Spectrum,are prime examples.
Each has distinct logistical advantages, which will make them successful for different users.
The Los Angeles industrial market vacancy rate inched down another 10 basis points in the fourth quarter to a razor-thin 1.5%. More significantly, the vacancy rate was down by over 50 basis points compared to fourth quarter in 2005.
Absorption in 2006 totaled an impressive 9.6 million square feet,twice the amount of new buildings added.
Given the impressive amount of activity in the market, average warehouse/distribution asking rents rose 5 cents last year. Carrying momentum from 2005, Los Angeles continues to reign as the tightest market in the nation.
Given the current market conditions of high demand and low supply, this year likely will be another landlord’s year.
Sale and lease activity moderated a bit compared to the feverish pace of 2005. With vacancy at miniscule levels, good functional product became harder and harder to find. In the fourth quarter, sale and lease activity totaled 7.9 million square feet, a decrease of 25 compared to the same period in 2005. However, the 41 million square feet of transactions recorded for the year remain impressive given the lack of supply. Demand for owner-user properties remained strong as sales activity accounted for a healthy 33% of the total activity for the quarter.
Cap rates for investment product continued to drop during the year as the median price per square foot climbed. Strong activity seen in 2006 will likely carry forward as interest rates remain low and local economic conditions remain robust. The total number of projects under construction was up slightly in 2006.
Still the national industrial market leader in construction activity, the Inland Empire closed 2006 mirroring 2005: heavy construction met with strong absorption, keeping the vacancy rate below 5%.
The reason: International trade, which generated close to $17.5 billion in the Inland Empire in 2005, is escalating. Import activity more than doubled from 2002 through 2005, with China accounting for about 50% of all international trade in the region.
As land availability near the (I-15) freeway has dwindled, builders congregated to cities along the (215) freeway, somewhat lured by DHL’s opening of a 330,000-square-foot cargo center at March Air Reserve Base. And companies followed.
Market Assessment
Close proximity to the ports of Los Angeles and Long Beach, competitive rents and available warehouses to accommodate large distribution operations held the year-end vacancy rate at 4.4%, up slightly from 2005’s 2.7%.
Companies are choosing the Inland Empire as a destination point to customize their operations or lease industrial buildings. This is impacting not only where construction is occurring, but the nature of the development cycle as a whole.
