GOLDILOCKS SECTOR
OC Warehouse, Manufacturing Holds Its Own, Shows Some Cracking Signs
By DANIEL D. WILLIAMS
Orange County’s industrial market,manufacturing, distribution and warehouse space,has dodged the ax that crashed hard on office and flex-tech buildings. At least so far.
For the most part, OC’s industrial sector held up in 2001 as distributors and manufacturers grabbed hard-to-find warehouses, plants and other buildings. So for in 2002, you could call it the Goldilocks sector of OC real estate,not too hot, not too cold.
Here’s how industrial developer Rob Guthrie, a principle with Laguna Hills-based Guthrie Development, put it: “I’m thankful I’m not an office developer and jealous I’m not a homebuilder.”
But while the industrial sector is better off than other real estate segments, it’s showing some signs of cracking.
“There was a constant deal flow during the first three quarters, then during the fourth quarter, we saw a 15% decrease in the number of deals,” said Tim Good, a broker with the Orange County office of Charles Dunn Co. “Cap rates and the prices per square foot remained about par overall, and we saw a 13% decrease in dollar volume in OC from 2000.”
After nearly a decade aggressive expansion, the national recession and Sept. 11 have put a damper on OC’s industrial sector. It’s not doom and gloom, local real estate sources say, but there is reason for concern out there.
OC’s big industrial spaces,100,000 square feet and up,have taken the biggest hits.
“There’s a noticeable slowdown in absorption for bigger space in Orange County,” said Bryan Bentrott, vice president of Newport Beach-based Master Development Corp., which is building the Skylab Corporate Center in Huntington Beach and an industrial project in Ontario. “Tenants and users in the larger sizes are generally corporate driven needs, not niche entrepreneurs.”
Economic uncertainty and the aftereffects of Sept. 11 have made businesses cautious about real estate moves, according to Bentrott.
Where there is activity among larger users is in the Inland Empire, where a slew of big leases have take place in recent months.
Even smaller businesses are looking to the Inland Empire, he said. In some cases, they’re buying.
“More than in the past, we’re seeing entrepreneurs above 100,000 square feet wanting to buy their buildings,” Bentrott said. “It was a rarity in the past, but they see buildings priced at $70 per square foot in OC, and can jump to 150,000 square feet at $45 to $50 per square foot in the Inland Empire.”
After a couple years of development, don’t expect to see any more large-scale buildings hitting the market anytime soon, according to Bentrott.
He cited the 200,000-square-foot industrial project developed last year by The O’Donnell Group in Anaheim as one of the last of the big-box rush.
“It had been up 30 days and was leased out, but if plans came out for it today, it would not even be built,” Bentrott said. “The equity and debt underwriters would say they aren’t willing to take the risk when there’s already similar product on the market not being taken.”
The bright side is that the large vacant buildings in OC will be absorbed during 2002, Bentrott predicts. But few new projects will join them, he said.
Economics are taking their toll on OC’s industrial market. Though local job growth fared positively last year, it was down from 2000,falling to 2.2% growth from 2.9% the prior year.
The biggest jobs hit took place in the fourth quarter with unemployment topping 5.7% nationally. Locally, things held up better with only 3.2% unemployment.
One source of encouragement for the industrial sector: analysts are predicting a 20% to 40% rise in defense spending.
The industrial sector remained relatively tight in the fourth quarter, even as the slowing economy pounded the overall commercial real estate market.
Year-end vacancy rates held below 5% with availability rates ending the year at 7.5% in OC, according to recent report by CB Richard Ellis Services Inc.
Overall, OC vacancy rates climbed from 2.4% during the third quarter to 4% in the fourth quarter. Again, those numbers outstripped national as well as state figures.
“We believe that overall numbers for availability and vacancy are still healthy,” said Steve Case, director of CB Richard Ellis for the Orange County region. “Those numbers (4.5% vacancy and 7.5% availability) are about the same as in mid-1999.”
Case concurs that industrial product begins to suffer at 50,000 square feet and up.
“Everything above 50,000 square feet is fairly slow,” he said. “Overall, leasing and sales were down 40% in OC in 2001, but activity in OC for 50,000 and below only were down 17%.”
In fact, the smaller projects carried the industrial market in 2001. For CB Richard Ellis, 80 of 96 industrial transactions in the fourth quarter were below 50,000 square feet. In South Orange County, CB Richard Ellis did not record a single transaction for more than 50,000 square feet.
“In South Orange County, where the tech sector is so strong, it’s been hit the hardest,” Case said.
Absorption rates also took a beating in 2001 after experiencing a record pace in 1999 and 2000.
With economic concerns weighing on tenants’ minds, an increasing number of deals were put on hold as manufacturers put off decisions to expand operations.
Net absorption hit negative numbers during the year. Industrial activity hit 11 million square feet for the year, with manufacturing and distribution figures holding steady.
Way off was the R & D; portion. After averaging 4 million square feet of activity the past couple years, R & D; slumped to 1.8 million square feet in 2001.
Bierbaum doesn’t see a quick recovery.
“There’s a big vacancy related to the sublease space being thrown on the market,” he said. “Tenants are not moving out. We think that’s a good indicator of what’s on the horizon, meaning we’ve got a good ways longer to go before recovering.”
If it’s a tenant’s market out there, then it’s even more of a buyer’s market.
Low interest rates are driving sales. According to CB Richard Ellis’ Bierbaum, many companies that had leases due and don’t foresee outgrowing their current space have decided to stay put and snatch up the property as owners.
“It’s been a really good time for them to buy,” Bierbaum said.
For real estate investors, it’s a good time to enter the market, according to Bierbaum. Many buyers have retired wealthy, thanks to land valuations, he said, and want to take advantage of a stable market with low interest rates.
Overall, prices have held steady, especially in buildings of 50,000 square foot or less, sources said.
And the smaller, the better.
“Buildings at 25,000 square feet and smaller are priced ridiculously low,” Case said. “Within the first week they’re on the market, there are multiple offers to buy. And that’s all over the county.”
Buying vs. leasing makes sense for many as asking lease rates have held steady.
With leases coming due, landlords are trying to jumpstart activity. But in all but the most extreme examples, rates have not declined with market conditions,dropping only a penny a month in most manufacturing and distribution buildings.
Leasing rates at R & D; sites, where availability is greater, have dropped about three cents.
The slowdown in activity and a lack of available land has all but halted new construction.
Manufacturing and warehouse space dropped from 1.5 million square feet under construction in fourth quarter to 651,000 square feet during the same period in 2001.
For the year, 2.5 million square feet of industrial space was added to OC with 289,482 square feet breaking ground during the fourth quarter.
Beyond an ample supply of existing space, two factors also are working against new development: Land is scarce, and what land there is is priced too high, according to industry sources.
Only two industrial projects are online now.
n The first phase of the Voit Brea Business Park, which accounted for 139,356 square feet and broke ground in the fourth quarter.
n Newhope Corporate Center in Fountain Valley, which stands to add 56,800 square feet.
Even so, interest in new space is strong, according to Mitch Zehner, a broker with Voit Commercial Brokerage.
“The investment market, is very strong, and will continue to be strong due to lack of product out there,” Zehner said.”Demand is outpacing the availability of product.”
According to Zehner, you have many investors out there who are tired of getting their clock cleaned in the stock market and want somewhere safer to invest their money. They’re finding it in industrial property, he said.
For Zehner, his listings throughout OC have been hot since November.
“Things were slow in September, but they moved up in October and have been up ever since,” he said.
The Voit Brea project is one of the largest speculative projects to hit OC in years.
Upon completion, the project is set to top 500,000 square feet. The $35 million development encompasses 16 buildings, ranging in size from 13,000 to 51,000 square feet.
The first phase,150,000 square feet in six buildings,is set for completion in July. The first building, a 28,000-square-foot facility is in escrow with a printing company, according to Zehner.
“We’re doing pre-sales and have sold three of the six buildings,” he said. “And we have another on the way.”
Zehner declined to name the buyers but said they are all light-manufacturing or distribution companies.
Another hotspot has been the 12-building, 101,363-square-foot Dyer Business Center developed by The Werdin Corp. of Newport Beach.
Located off Dyer Road and the Costa Mesa (55) Freeway in Santa Ana, the project has nearly sold out in its first six months on the market. So far, Werdin has closed on 11 of the 12 buildings. The properties range from 6,825 square feet to 10,853 square feet.
