DON’T PANIC
Builders, Owners Remain Upbeat as Tight Industrial Market Loosens in First Quarter
After months of hemming and hawing about a potential downturn in the Orange County real estate market, the industry is facing a dose of bad news: the industrial sector has experienced its first quarter of negative absorption since 1997.
The industrial market also suffered a falloff in activity and a rise in vacancy in the first quarter, according to a report by CB Richard Ellis (see page 28).
A lack of available buildable land, high rental rates and general economic uncertainty factored into the downturn. And, industry sources stress the word “downturn” as opposed to “nosedive” or the dreaded “r” word, “recession.”
“The market’s not that bad,” according to one source, “it has just been so tight, it had nowhere else to go.”
The economic slowdown has not hit the Southern California real estate market as hard as other parts of the country.
“The East has already taken a hit,” said Randy Coe, a broker with Colliers Seeley International (see reports on pages 49 to 59). “We’ve continued to have growth, we’re just growing at a decreasing rate.”
Overall, the industrial market finds itself in somewhat of a Catch-22. The demand for industrial product, especially the large facilities (50,000 square feet and up), is strong. However, due to a severe lack of land, such large blocks of space are not coming on line in OC. When land is available, it doesn’t make economic sense to build industrial developments on it, according to Clyde Stauff, senior vice president with Colliers Seeley International.
“The land is extremely limited or too expensive to support industrial construction,” Stauff said.
What has come on the market locally are older, mostly lower-quality, spaces. If the spaces aren’t older, they’re too small. At the end of the first quarter, nearly 80% of available space on the market was in chunks smaller than 50,000 square feet, leaving many large-scale industrial users without a place to go in OC.
That quandary has pushed tenants to LA County and the Inland Empire in search of the large-scale facilities. Colliers Seeley International already has wooed three OC companies to a project it has under way in Santa Fe Springs, according to Stauff.
These market factors have begun showing up in the numbers. Industrial vacancy in the first quarter rose to 1.5%,still extremely tight,from 1.2% in the fourth quarter. The availability rate for industrial space overall increased to 5.8% in the first quarter from 4.8% in the fourth. Meanwhile, sale and lease activity slowed 36%, totaling 3.1 million square feet in the first quarter.
As for asking lease rates, the industrial market remained stable at 63 cents per square foot per month with the asking rent price for M & W; dropping a penny. For R & D; space, the asking lease rate jumped to 80 cents per square foot from 74 cents in the fourth quarter.
However, at least one industry source said it did not make sense to place the numbers under a microscope, considering the market conditions.
“Generally speaking, the market’s fine,” said Paul Marshall, senior vice president for Opus West.
When you have a vacancy rate in the neighborhood of 1%, the market indicators are very sensitive and less meaningful, according to Marshall.
“You had a few manufacturers move out to say, Corona, for a lower-cost alternative, sending vacancy rates from 1.2% to 1.5%. That’s just not that much. In the scheme of things, anything below 5% is very good,” Marshall said.
By submarket, West and South Orange County fared better than the North and Airport Area. Both West and South OC reported positive net absorption in the first quarter for the M & W; and R & D; sectors. They are, however, the smallest submarkets. North OC, which has nearly 44% of the county’s total industrial space and about 60% of its M & W; space, and the Airport Area, which had the most activity in the first quarter, experienced significant negative absorption. But even though it saw more than 480,000 square feet returned to the market, the North OC vacancy rate remained in the 1% range.
“The North County is the solid backbone of the industrial sector,” Coe said.
But is it a backbone in dire need of a chiropractic adjustment? Coe and other industry sources don’t think so, saying they have seen a healthy level of transactions so far this year. Coe helped close a deal in Fullerton involving an 11-building industrial park, and an 80,000-square-foot industrial building recently sold in Santa Ana for $6.2 million.
Most believe the demand is there. Rob Guthrie, president of Guthrie Development, has witnessed solid industrial success lately. His company will complete construction on the 165,000-square-foot, six-building Lakeview Business Park in Anaheim next month. Three of the six buildings already have sold.
“We consider that a tremendous success,” Guthrie said. “That’s ahead of our schedule. We were hoping for one pre-sale and then one a month after that.”
Guthrie believes the activity remains strong in some market niches.
“We’re seeing that smaller is better right now,” he said.
In looking at R & D; product, the 5,000- to 10,000-square-foot buildings are selling well. But, to make it through this downturn, some developers will have to change their mission, at least for the short-term, according to Guthrie.
“Business owners are telling me their businesses are doing well,” he said. “But with the real estate uncertainty, they’re looking more toward leasing for now, with an option to purchase.” n
