By STEVE BATCHELLER
Gross absorption in the Mid-Counties industrial market was strong in the first quarter at 1.6 million square feet, up 4% from the prior year.
The comparison is notable for a couple of reasons: 2005 recorded the highest annual gross absorption (10.3 million square feet) in the history of the submarket and the absorption took place in a market with a third less available space than in the same period a year earlier.
Though the first quarter’s absorption total was lower than the previous three quarters, it marked the ninth consecutive month of more than 1.5 million square feet of gross absorption.
With only 286,788 square feet under construction and less than 600,000 square feet of industrial space in the planning stage, it is anticipated that net absorption will be solid during the next quarter.
The result of this continued strong industrial demand is an extremely tight market with an overall availability rate of 5% and an actual vacancy rate of 2.5%.
Larger buildings of more than 200,000 square feet are especially constrained, with only four available buildings in the entire market.
As a result, industrial lease rates and sale prices are increasing for all size ranges.
Lease rates continue to grow at roughly a 10% annual clip as seen in 2005. Sale prices continued to surge in the first quarter.
The largest price spikes have impacted buildings smaller than 20,000 square feet, with industrial users paying more than $130 per square foot for older, functional buildings and in excess of $170 per square foot for newer buildings in this size range.
Sale prices are up more than 40% during the past year. While prices aren’t expected to continue rising at that pace, the sale market will remain strong during 2006 due to the lack of available buildings, attractive long-term interest rates and business owners’ desires to invest in Southern California real estate.
Similar trends continue to influence the investment side of the market.
Both institutional and individual investors are paying top dollar for all building classes, despite rising long-term interest rates.
The most common thread in driving investor demand is optimism for rent growth in the short and long terms,due largely to the lack of developable land in Mid-Counties.
In addition, aside from healthy regional and national economic momentum, the industrial base will continue to tighten in Mid-Counties during the next several years because of residential zoning conversions and the inevitable widening of the Santa Ana (I-5) Freeway by Caltrans.
Batcheller is a senior vice president in Newport Beach office of CB Richard Ellis Group Inc.
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