In the second quarter, a slumping economy continued to create a cautious business environment that affected the Orange County industrial market. This has led to the majority of submarkets seeing decreases in average asking rents, and increases in vacancy and availability. The total vacancy rate for OC inched up to 3.1% from 2.8% earlier this year, reflecting a slower market, but one that continues to be fundamentally healthy.
The second quarter saw a total negative absorption of 690,425 square feet, as leasing of large blocks of space has eased. The North County market was impacted the most, with negative 721,475 square feet of absorption, largely because companies continue to opt for short-term lease renewals over relocating in their efforts to wait out the economic downswing.
Demand for manufacturing and warehouse space decreased in the second quarter, with this segment of the industrial market slipping to 2.1 million square feet of gross activity. Meanwhile, the research and development sector was relatively flat with total gross activity of 426,966 square feet and a county vacancy of 8%.
Average asking lease rates for manufacturing and warehouse and research and development buildings fell back 2 cents to an average of 76 cents in the second quarter. In addition, the average asking sale prices dropped to $169.81 per square foot. Overall, newer buildings in the industrial market are attracting the most interest.
Meanwhile, investment sales have dropped significantly, although buyers continue to seek properties that will position their companies for future growth. Despite the challenging investment environment, the industrial market is showing resiliency; there have been several big sales in Seal Beach recently totaling more than 240,000 square feet.
West County showed the most robust activity last quarter with absorption of 348,648 square feet driven by several significant sales at the Pacific Gateway Center in Seal Beach. Across the board, activity decreased from the first quarter, with gross activity down by 104,285 square feet. Overall, most submarkets saw negative absorption with North County seeing negative 721,475 square feet. The county saw 690,425 square feet of negative absorption.
OC’s availability rate ticked up from the first quarter’s 6.3% to 6.8%. Manufacturing and warehouse availability rose 60 basis points to 6.6%. The research and devel-opment sector saw a half a percentage point bump in the second quarter to 8% from 7.5%.
The combined vacancy level for both manufacturing and warehouse and research and development buildings increased to 3.1% from 2.8%. The manufacturing and warehouse vacancy rate inched higher to 3.1%, while research and development slightly rose to 3.3%, the most significant rises in years. Overall, West County has the highest total vacancy rate of 4.3%, down from 5.2% in the first quarter.
Rents
Asking rents remain strong for OC industrial buildings at 76 cents per square foot. Year-to-date, the average asking lease rate for manufacturing and warehouse buildings has flattened at 69 cents per square foot. Research and development buildings jump to $1.08 per square foot, up 5 cents from the first quarter. The greater airport area saw the most significant quarterly asking rent increase, with manufacturing and warehouse buildings rising 1 cent to 83 cents per square foot and research and development buildings rising 8 cents to $1.13 per square foot.
Most submarkets saw asking rents dip slightly for the first time in years. Manufacturing and warehouse buildings in North County fell off by 3 cents to 61 cents per square foot. Average asking sale prices also fell back nearly 1% from the first quarter to $169.81 per square foot. Manufacturing and warehouse buildings have an average price of $161.99 per square foot, whereas research and devel-opment buildings stand at $212.84 per square foot.
Eleven buildings were completed in the second quarter for a total 179,253 square feet. Ten of these buildings are located in North County’s Valencia Business Center, adding 118,080 square feet to the city of Fullerton. In San Clemente, a research and development building completed construction, totaling 61,173 square feet. Currently, there is 259,624 square feet of buildings under construction in North County and West County, as well as 14,507 square feet in South County. OC now has 247 million square feet of industrial space.
Data and analysis by CB Richard Ellis Group Inc.
