By IAN BRITTON
Orange County’s manufacturing and warehouse market continued to thrive in the fourth quarter, marked by strong levels of activity, increasing lease rates and sale prices and low vacancy rates.
The ports of Los Angeles and Long Beach have been the primary driver for warehouse space in the greater Los Angeles and OC industrial markets.
Apparel-related companies, logistics businesses and companies importing goods from China continued to absorb class A space at a record clip.
Sophisticated distributors are insisting on modern class A features such as 30-foot minimum clearance, advanced sprinkler systems and oversized truck courts to maximize efficiency.
With a limited supply of land for the development of large new facilities, tenants are starting to compete with one another for the select few available sites in this tight environment.
Strong levels of absorption and limited inventory tip the scales in landlords’ favor. Asking lease rates for class A space have increased 10% to 15% since the third quarter of 2005 and now are in the mid 50-cent range, triple net, per square foot.
While class A lease rates have appreciated significantly, rates among older, more obsolete buildings offering lower ceiling clearance and less attractive features are in flux.
Average lease rates across the county actually have trended lower for older buildings, with space offered at discounted rates in the high 30-cent to low 40-cent range, triple net.
It’s no secret that core manufacturing is being sent overseas or relocated to less expensive parts of the country.
On the positive side, OC’s manufacturing base is more diverse than most other parts of California and still is adding jobs in the technology and medical sectors.
As more labor-intensive manufacturers leave the county, many of their plants are being sold to residential developers who plan to turn them into high-density condominiums or apartments.
Anaheim’s Platinum Triangle and the recent conversion of several facilities in the Irvine Business Complex are prime examples of residential entitlements increasing the market value of these properties by 20% to 40%.
Amid the shrinking industrial base, lease rates rose as much as 6 cents per square foot in some parts of OC in the fourth quarter, versus the prior period. This trend is expected to continue.
Interest rates continue to remain attractive, which has fueled the robust sale market for the past several years.
Sale prices across the county have increased as space becomes more difficult to find, hitting an average of $127 per square foot in OC for buildings ranging from 10,000 square feet to more than 100,000 square feet.
Smaller buildings in South County and parts of North County have pierced the $200-per-square-foot barrier and most of the county’s new development projects have been pre-sold during construction.
On the investment side, OC’s industrial market remains one of the most dynamic and sought-after acquisition markets in the U.S.
Cap rates continue to drop despite the threat of rising interest rates. OC continues to command premium values for industrial assets. The diverse nature of the O.C. economy and its qualified labor base continues to attract capital from real estate investment trusts, pension funds, foreign investors and 1031-exchange buyers.
Attractive market conditions, stable job growth and OC’s entrepreneurial spirit point to a healthy manufacturing and warehouse sector in 2006.
Britton is a vice president in the Anaheim office of CB Richard Ellis Group Inc.
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