Orange County’s industrial market largely has sidestepped the troubles seen in the area’s office sector this year. Those in the sector are keeping their fingers crossed that it can last.
“The market’s not at the level it was six months ago. Transactions have slowed down a little,” said industrial broker Jeff Chiate, executive director for the Irvine office of Cushman & Wakefield Inc. “But overall, we’re in much better shape than the office sector.”
Like the office market, asking rents for OC’s industrial buildings continue to increase at a rapid rate.
In the third quarter, industrial rental rates climbed by 16% from a year earlier, according to the Irvine office of Colliers International. The monthly weighted average asking rental rate countywide reached 76 cents per square foot, per month, and $1.11 per square foot in South County.
These are record-high rates for OC, and are the highest rental rates in the Los Angeles Basin, according to Colliers.
Unlike the office market, those rate increases in the industrial sector aren’t happening during a time of rising vacancy rates. The area’s roughly 217 million square feet of warehouse, distribution and research and development space is nearly 96% full, on par with a year ago.
“The main thing is that the area hasn’t overbuilt,” said Bob O’Neill, investment officer for the Irvine office of Chicago-based First Industrial Realty Trust Inc.
There was about a quarter-million square feet of industrial space completed in the third quarter, according to Colliers. Less than 1 million square feet of additional construction (primarily small industrial buildings for sale) was in the pipeline at the end of the quarter,the lowest amount in more than a year.
“We’ve lost so much industrial inventory to residential conversion, that it’s kept the market constrained,” Chiate said.
Big Deals, Big Dollars
The strong market has resulted in a string of big deals being made as of late, both leases and sales.
Pods of Los Angeles LLC, the portable storage company, last month signed a six-year lease for 122,600 square feet at Crossroads Anaheim.
It’ll use the distribution space as its main OC storage center facility, after moving from a 32,000-square-foot site in Fullerton. It’s the biggest warehouse that Pods of Los Angeles will use companywide.
The deal, which began in October, was valued at about $6 million. At a monthly rental rate of 65 cents, it’s a market high for that type of property in north Anaheim, said Voit Commercial Brokerage LP’s Louis Tomaselli, who represented BPG Properties Ltd., the building’s owner, in the lease.
On the sales side, First Industrial was behind the biggest deal in the third quarter. After less than a year of owning it, the company sold a 366,629-square-foot industrial facility in Santa Ana, next to the Tustin Legacy development, to Newport Beach-based Greenlaw Partners and partner Commonfund Realty Inc. of Wilton, Conn.
The sale was valued at $46.5 million. It was a quick turnaround for First Industrial, which reportedly paid shy of $40 million when it bought the property in January
Those types of deals aren’t likely to be the norm as the jitters in the credit markets put a pause on industrial sales, O’Neill said.
“I think you’re more likely to see 3% to 5% appreciation,” he said.
Colliers data shows the average sales price per square foot for an industrial property dropping about $5 in the past year, to about $146. After a nearly 100% run-up in prices the prior five years, that’s not too much of a concern, brokers said.
“Prices are holding firm. But the difference is that you were getting five offers (for a property) a year ago, now you’re getting one or two,” Chiate said.
Chiate and Cushman’s Rick Ellison just finished selling out 47 industrial and office buildings at Costa Mesa’s Coppertree Business Park, for a total of $66 million.
If the industrial market is going to see any fallout from the subprime mortgage mess, most assume it will be in the sales of projects targeting small businesses looking to own their own properties.
So far, that hasn’t been the case. The Small Business Administration still is making loans to finance these purchases, Chiate said.
Slower Timelines
The vacancy rates in industrial and office buildings now differ by about 10%, but one ominous similarity the industrial sector shares with OC’s office market: a number of big, empty buildings have taken longer than most expected to lease up.
Among the beneficiaries of that slow leasing environment was Sasco, one of the country’s top electrical contractors. The company said in September it was moving its headquarters to Fullerton from Cerritos.
Sasco signed a $17 million, 10-year lease for about 221,000 square feet at 2750 Moore Ave. The Fullerton property, owned by a San Francisco-based public employee pension fund, was vacant for close to a year prior to the Sasco deal being struck.
Likewise, it took nearly six months to land Pods of Los Angeles for BPG’s Crossroads Anaheim.
The next year could see a shake-out in the area’s industrial space. A number of big tenants are in the market for larger warehouse and distribution properties, notes Jeff Cannon, corporate managing director for the Irvine office of Studley Inc.
“There’s no let up in demand for larger blocks of space. For blocks more than 100,000 square feet, it’s as strong as ever,” Cannon said.
Among big names on the lookout for space is Huntington Beach-based apparel company Quiksilver Inc., which is considering moving operations elsewhere in the county in the next few years. Quiksilver could expand to take as much as 500,000 square feet in the next three years, according to company officials.
Other big area businesses eyeing relocation for their industrial operations include St. John Knits International Inc. The company’s lease for its factory in Irvine runs out in 2011.
Studley’s Cannon, who represents tenants, says area industrial landlords are starting to dial back some of their lofty rent-increase projections in order to get deals done.
“Larger landlords are working harder to retain their tenants. Rents are rising, but they’re not spiking them too high, to push out tenants,” Cannon said.
Part of that is due to more tenants increasing their property searches to elsewhere in the county, or the Inland Empire, which gives them more bargaining leverage. Also, the recent credit crunch, trade issues with China and other economic woes are convincing landlords to get deals done with existing tenants, rather than press their luck with finding a new occupant for the empty space, he said.
