By ZACHARY NILES
The third quarter proved that the second quarter’s strong manufacturing and warehouse showing was no anomaly. Market fundamentals continued to improve and the leasing market posted strong activity growth in the period.
Vacancy and availability rates declined, net absorption improved and, despite an increase in concrete and steel prices, new construction continued to rise. Expect a steady increase in manufacturing and warehouse lease rates next year as class A facilities are absorbed and interest rates rise.
By far the most improved real estate sector in Orange County, the manufacturing and warehouse leasing market continued to gain momentum in the quarter.
Vacancy and availability rates dropped 0.1% and 0.3% versus the previous quarter to 4.7% and 7%, respectively. Availability is 4.2% below the national average.
Net absorption totaled 260,554 square feet. Combined with the second quarter, the 1 million-plus square feet of positive absorption is the highest two-quarter total since the end of 2000.
Though the average asking lease rate declined three cents to 56 cents per square foot, all indicators point to rent growth in 2005 as class A facilities are absorbed, interest rates climb and landlords limit previously substantial leasing incentives (tenant improvement concessions, rental abatement and more).
Vacant manufacturing and warehouse buildings for sale up to 40,000 square feet continue to be the most active sector of the OC market. Historically low interest rates and 90% loan-to-value SBA financing has resulted in significant demand in a market where land is scarce and supply is limited.
Developers have caught on, however. Nearly 300 buildings are under construction or are in the planning stages, the majority of which are for sale. North County, where little new construction has taken place during the past decade, has six developments planned or under way in Anaheim, Brea, La Habra and Orange.
Institutional and private investors continue to have difficulty buying quality investment property. Historically low interest rates and an insecure stock market has driven substantial capital to the real estate markets seeking safer and more predictable investments.
This shift has resulted in a supply and demand inequality, driving cap rates to historic lows, which some predict will rise with interest rates. Others contend it’s likely that the correlation between cap rates and interest rates will be far less significant than in the past.
Corporate mismanagement and a tech-sector bust sent weary investors seeking a more conservative, tangible investment; real estate was the answer. Real estate investment trusts, pension funds and insurance companies never have committed so much capital to institutional grade real estate than they do today.
Rather than a gradual trend, statistics indicate a major shift in investment strategy. REITs alone accounted for more than $224 billion of equity at the end of 2003, according to the National Association of REITs. That was triple that of 1996 and more than 20 times greater than the previous recession.
Considering the nature of these institutions and the amount of capital flooding the market, demand for less risky real estate investments is expected to continue to outpace supply, holding cap rates hostage near current levels.
Niles is a senior associate in CB Richard Ellis Group Inc.’s Southern California Industrial Properties Group.
