As the fourth quarter came to a close, Orange County faced slow industrial demand as well as increased availability and vacancy levels, which is a result of the waning national economy.
OC saw negative 495,350 square feet of absorption last quarter bringing the year-to-date absorption total to negative 2.8 million square feet. The county’s increased availability and vacancy rates can be attributed to listed properties spending more time on the market and subsequently becoming vacant as tenants moved out of space. An increase of sublease space also adds to available inventory as companies look to close or consolidate locations as the fragile economy continues to drive down the demand necessary to keep companies afloat.
In the midst of the nation’s recession, however, there are companies making decisions to locate operations in OC as seen by the 147,136-square-foot lease signed by La Jolla Sports USA Inc. in Irvine as well as the 115,870-square-foot lease by Umeco PLC in Huntington Beach.
The credit markets remain unpredictable, making it increasingly more difficult for buyers to obtain the credit necessary to finance a building. During the past year, there has been a 50% decline in user sales. This is due to a combination of lack of financing and, in some cases, buyers with the needed funding already in place deciding to hold off on purchasing a property, as no one is really sure just when real estate prices will hit bottom.
The average asking sale price in OC decreased only slightly last quarter to $166.32 per square foot, as it becomes more evident that the market has shifted toward a “buyer’s market.” Each of OC’s four submarkets saw a decrease in the average asking lease rate last quarter, with the exception of North County, which remained unchanged from the 63 cents per square foot posted in the third quarter.
Absorption
OC saw a total of 495,350 square feet of negative absorption last quarter. The West and South County submarkets were both major contributors to this negative absorption, each responsible for more than 200,000 square feet.
The airport area was the only submarket to post absorption, with 15,841 square feet. North County recorded more than 92,000 square feet of negative absorption.
Although activity reached nearly 2 million square feet in the fourth quarter, it was not enough to combat the slowing demand and the amount of space being vacated by tenants.
Vacancy and Availability
During the fourth quarter, the OC industrial market saw an increase in both availability and vacancy. The overall OC availability rate increased 11% from the third quarter’s rate of 7.4% to stand at 8.2% at the close of the fourth quarter. The OC vacancy rate rose to 4% in the fourth quarter from 3.7%. Vacancy for the research and development market saw a noticeable increase in vacancy to 3.5% from 3.1%, while the manufacturing and development market increased to 4.1% from third quarter’s rate of 3.9%.
Average Asking Lease Rates
Average asking lease rates in OC decreased from the previous quarter’s rent of 75 cents per square foot to close the fourth quarter with an average asking lease rate of 73 cents per square foot. North County’s lease rate remains unchanged at 63 cents per square foot last quarter, while both the airport area and South County submarkets saw reduced rental rates of 4 cents to 80 cents and $1.02, respectively. The average asking rent in West County dropped 2 cents to 64 cents per square foot.
Construction
OC’s construction activity has decreased dramatically from just one year ago. In the fourth quarter, 11 properties completed construction totaling 230,873 square feet. Nine of the buildings totaling 207,265 square feet are in the Kimberly Business Center in Fullerton. Two Santa Ana properties added 22,608 square feet to the greater airport area’s inventory.
While no additional properties broke ground last quarter, only one property remains under construction totaling 14,507 square feet. More than 300,000 square feet of development remains in the planning stage and will most likely begin construction once sustained demand can be established.
Analysis by CB Richard Ellis Group Inc.
