ORANGE COUNTY
Demand for Orange County industrial space remained high in the second quarter, despite signs that the national industrial market is leveling off due to a suffering housing market and a lackluster manufacturing sector. OC has held steady with slight manufacturing job growth the past four years and Chapman Economic Research pegged overall job growth for the county at 15,000 jobs in 2007, a 1% gain from the previous year. The jury still is out on whether significant job growth will be recorded in industries looking to occupy space.
Investment demand for industrial buildings will continue at a record pace, pushing prices higher and capitalization rates lower thanks to the good long-term fundamentals of the OC industrial market. For example, Walton Street Capital LLC recently acquired an industrial portfolio from CalWest Industrial Holdings for an estimated $400 million. The 118-building portfolio totaled 3.3 million square feet. Lesser-quality buildings, however, will experience a little difficulty due to the recent tightening of lending standards.
Looking ahead, OC’s industrial base will continue to shrink as existing space is redeveloped into higher-end space of varying property types. Direct vacancy and availability rate levels remained low at 3.7% and 5.7%, respectively. Under-construction activity totaled 664,070 square feet with the majority in buildings less than 20,000 square feet. And lease and sublease activity has slowed mainly because there isn’t enough space to lease. Net absorption for the county totaled 268,024 square feet since second quarter 2006, while average asking rents remained unchanged at 92 cents per square foot.
The industrial market will remain healthy, but an attitude of wary optimism will reign in the OC business community. Positive job growth will generate continued absorption in the industrial sector while available space, at a premium in all size ranges, will command higher lease rates and sale prices as supply steadily diminishes.
INLAND EMPIRE
Still the national leader in industrial construction activity, the Inland Empire held its robust market fundamentals, fueled by international trade tied to the ports of Los Angeles and Long Beach. And with Los Angeles County’s vacancy rate at less than 2%, national companies are seeking out the Inland Empire for larger space at competitive rents. During the second quarter, 21 transactions were signed for spaces in excess of 100,000 square feet.
Developments on the western edge of the Inland Empire are in higher demand from tenants who are attracted to the transportation corridors that already are in place. But developers continue to build large speculative distribution facilities farther to the east in cities such as Moreno Valley, Perris and Redlands, causing temporary spikes in those submarkets’ vacancy levels.
Despite temporary vacancy rate spikes, developers and investors,anticipating future opportunities to garner market share,are acquiring existing buildings and land parcels in emerging submarkets. Recently, First Industrial Realty Trust acquired a five-building site in Perris, only to later buy an additional 205 acres for a planned business park.
Los Angeles
Nearly 3 million square feet of industrial space was absorbed in the second quarter. The vacancy rate, however, remained at 1.8%, mostly due to 1 million square feet of new vacant space in the South Bay market. During the past year, the total amount of space has grown by more than 27 million square feet, yet the vacancy rate has held steady. San Gabriel Valley was home to nearly 1.6 million square feet of absorption, accounting for 55% of the L.A. County total. Four of the five submarkets posted absorption, with only the Mid-Cities submarket in the negative column.
Asking rates in Los Angeles finished the second quarter at $0.60, down 1 cent from the previous quarter and unchanged from last year. The market is very tight and the space left up for sale is not desirable, causing the rates to be flat.
Sale and lease activity topped 10.5 million square feet with all five of the markets that comprise the L.A. metropolitan area posting activity greater than one million square feet. The activity is being driven by larger companies that can more readily accommodate the higher prices that new space commands.
Demand is strong for smaller owner-user space, but it remains in short supply. Construction activity remains minimal when compared to the total market base. There is virtually no new land to develop and almost no new industrial projects going up.
Analysis by Grubb & Ellis Co.
