By BRIAN DEREVERE
It can be somewhat misleading to compare manufacturing and warehouse space over a 200-million-plus-square-foot market such as Orange County.
That said, there are some statistically significant trends including third-quarter average asking lease rates up 10.5% from the second.
This represents a considerable rent spike where we have seen rents moving upward at a more measured pace throughout the first two quarters of the year.
Additionally, third quarter vacancy at 2.7% is noticeably down (12.9%) compared to a year earlier.
Although statistics tell a general picture, the fact we combine manufacturing and warehouse statistics does not tell the whole story. Regardless of size range, the strongest demand is on two fronts:
n Smaller, well located and functional manufacturing buildings for sale.
n Distribution buildings with good loading, high sprinkler calcs and greater the minimum clearance the better.
As larger manufacturing buildings turn over, the reuse of these facilities becomes more troublesome. As the rush to convert older manufacturing buildings to housing has abated, it brings back into play the need for creative reuse strategies and/or demolition of these facilities for development.
The demand for 10,000- to 50,000-square-foot manufacturing buildings remains strong, especially for sales. This whole segment is driven by local entrepreneurial users.
This strong demand is somewhat tempered by older, less functional facilities in lesser locations that will continue to sit. In West and North Orange County, the influence of the ports of Long Beach and Los Angeles continues to be felt with strong demand for class A and class B warehouse facilities. It is reasonable to forecast continuing demand and rent growth for true warehouse and distribution buildings.
While it is difficult to predict exactly what will occur in 2007, supply and demand dynamics and macroeconomic indicators show it will again be another strong year for industrial real estate.
The low vacancy rates and general lack of construction will be an issue in satisfying demand for both manufacturing and warehouse users.
The Pacific Gateway Business Center in Seal Beach is the largest industrial project under construction in Orange County. In January it will add 626,000 square feet as the first phase is completed. Other markets have limited construction under way. Most notably South Orange County has zero square feet under construction for buildings 10,000 square feet and above.
Although it is difficult to read the Federal Reserve tea leaves, there is a reasonable probability long-term interest rates will remain close to current levels.
Depending on which sources you want to believe, they actually could move lower in the first half. This should help keep user and institutional buying demand at strong levels. Although there may be some caution in the capital markets, we see decent growth potential for lease and sale prices in 2007.
DeRevere is a senior vice president in the Anaheim office of CB Richard Ellis Group Inc.
Single- and multi-tenant manufacturing and warehouse buildings 10,000 square feet or larger. Net absorption does not include preleased space. Lease rates are triple net per square foot, per month, excluding free rent, tenant improvements and other concessions and weighted by vacant square feet. Historical figures have been adjusted to reflect changes to the base. Historical figures may not agree to previously reported figures. Data provided by CB Richard Ellis’ Global Research & Consulting.
