By ZACH NILES
Overall industrial activity in Orange County appears to have cooled during the second quarter for the first time in five quarters.
The second-quarter industrial vacancy rate ticked up 10 basis points to 3.7%, versus the first quarter, as a result of 112,683 square feet of negative absorption, while average asking lease rates declined by 4 cents to 54 cents per square foot, triple-net.
But is the market really cooling?
The nominal statistical declines for the manufacturing and warehousing leasing sector may indicate some slowing, but a closer examination reveals a market expected to post solid rent growth in the near future.
The natural vacancy rate,that is, the period of vacancy attributed to the time a landlord requires to prepare a space for a new tenant following a vacancy,is considered to be about 3% in OC, leaving a real vacancy rate of just 0.7%.
Slight variations in vacancy and absorption are typical of a constrained market.
A survey of class A space reveals even more constriction as tenants seeking greater cube efficiency acquire the increasingly limited supply.
The combination of limited supply and strong demand in a land-starved environment represents a market ripe for significant rent growth.
New construction during the next 12 months will provide little relief for tenants seeking larger space.
The 706,528 square feet of construction under way is made up primarily of buildings for sale smaller than 50,000 square feet in size aimed at small business owners seeking to take advantage of historically low interest rates.
The average asking sale price increased nearly 12% to $111.21 in the first quarter, versus a year ago,yet another record high.
Buildings smaller than 10,000 square feet, which are not counted in the data above, represent a significant amount of the sale and development activity in OC.
More than 200 buildings less than 10,000 square feet in size were under construction or being converted to industrial condos at the end of the quarter and several other projects to follow are in the planning stages.
Asking sale prices have exceeded $200 per square foot for such buildings.
With little open land remaining to develop in OC, residential developers have narrowed their sights on the industrial sector with the intention of converting peripheral and antiquated industrial facilities to homes.
This shift is contributing to a decrease in OC’s overall industrial base.
Niles is a senior associate in the Anaheim office of CB Richard Ellis Group Inc.
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