CALIFORNIA INDUSTRIAL MARKET
ORANGE COUNTY
The Orange County industrial market finished the year with 12.4 million square feet of sale and lease activity, up 1.5 million square feet compared to 2002.
The market showed some signs of strength last year, stemming from a renewed leasing pickup during the last half of the year combined with the continued frenetic pace of the sale market.
Despite the overall increase in activity, the vacancy rate in OC increased in the fourth quarter to 8%, versus 7.8% in the previous quarter.
Sale and leasing activity in the fourth quarter rose by 100,000 square feet to 3.1 million square feet compared to the previous quarter. The John Wayne Airport area accounted for 46% of the activity.
Lease activity jumped 39% in the fourth quarter compared to the first quarter last year. Two lease deals in the fourth quarter were for space greater than 100,000 square feet.
Activity is coming from relocations and lease renewals as tenants start to take advantage of soft leasing conditions. Movement from larger tenants continues to be soft, while many are waiting for the economy to show signs of strength, perhaps in 2004.
INLAND EMPIRE
The Inland Empire ended the year with a 6.9% vacancy rate, positioning itself for the next phase of development along the I-10 Corridor.
Speculative developers pushed deeper east amid high demand in the market’s western cities,Ontario, Mira Loma, Rancho Cucamonga, Chino and Fontana.
With access to surplus military land from three closed Air Force bases, national developers have drawn up plans. At Norton Air Force Base, Hillwood will develop Alliance California,a planned transportation and logistics hub of up to 2,200 acres. Mattel and Kohl’s have signed on.
An expansion of Burlington Northern Santa Fe’s intermodal terminal will become crucial in maintaining logistical support.
The Inland Empire’s western cities accounted for 73% of speculative space under construction, with the majority small to mid-sized buildings.
Plans for a mixed-use development of industrial and air cargo facilities on 100 acres at Hoffer Ranch were announced. The site will be close to Ontario International Airport, freeways, rail lines and UPS’s western hub.
LOS ANGELES
The Los Angeles market ended the year with the lowest vacancy rate in the country at 3.2% and a limited supply of land for future development. Healthy user demand generated nearly 45 million square feet of sale and leasing activity in 2003.
Businesses now are looking east to the Inland Empire or north to the Santa Clarita Valley where there is available space and land.
In Los Angeles County, sale and leasing activity in 2003 was down by more than 5.7 million square feet from 2002. Demand was tempered by more than a lack of supply.
Unable to compete with the labor costs of Mexico and China due to California’s high costs of workers’ compensation insurance and state tax, an increasing number of businesses outsourced overseas.
Driving much of the activity in 2003 was the sale market. With interest rates at their lowest levels in 40 years, cash flow into the buying market became a flood in 2003 that will continue into 2004. To cope with the unavailability of land and still meet user demand, developers will seek redevelopment projects by purchasing larger, older industrial buildings and converting them into mixed-use projects.
Vacancy Declines, Absorption Down, Lease Rates Flat
The challenges faced by California businesses continued to hinder the growth of Orange County’s industrial market during the fourth quarter.
Increasing business costs have caused downsizing in both the manufacturing and warehouse and research and development sectors. As a result, the county-wide vacancy rate fell to 5.7% this quarter.
Despite falling occupancy in 2003, gross activity grew, asking lease rates stabilized and the amount of new space decreased this quarter, indicating that a market rebound could be on the horizon.
Vacancy
The amount of available square feet dropped for the first time in a year, despite the overall increase in vacancy seen this quarter.
South County held the highest vacancy rate in the county but also was the only market to see a drop in its supply of vacant square feet in the fourth quarter.
Although Orange County has seen a gradual increase in unoccupied square feet in the past six quarters, the industrial market remains fairly tight at 5.7%.
Net Absorption
Net absorption remained negative for both manufacturing and warehouse and R & D; buildings during the fourth quarter.
South County was the only market to post positive absorption in the period. The area reported positive levels during three of four quarters in 2003.
Much of the space that became vacant in the quarter had been listed as available but occupied during previous quarters,only during the fourth quarter did the tenants actually move out.
If the amount of new space becoming available continues to decline, continued strong lease and sale activity could lead to positive absorption levels in 2004.
Lease Rates
The increase in vacancy this quarter did not lead to an overall decrease in asking rents.
An increase in asking rents to 53 cents per square foot was seen in the manufacturing and warehouse sector this quarter while the average for R & D; remained steady at 70 cents per square foot.
West County was the only area to experience a bump in industrial asking rates this quarter. North County remains the least expensive market with an asking rent of 50 cents per square foot.
Construction
Although industrial construction dropped slightly in the fourth quarter, there was more space being built at the end of the year than at the end of 2002.
The completion of 13 buildings this quarter alone added more than 730,000 square feet to the industrial base.
Manufacturing and warehouse buildings still represent the greater part of construction activity, accounting for over 75% of industrial space being built and about 86% of completed construction this year.
Analysis provided by CB Richard Ellis’ Information Management Department.
