A sluggish first quarter was a tough way to start 2009 in the North and Central County industrial real estate markets.
Unfortunately, the market did not improve during the second quarter. In fact, even though vacancy rates stayed flat, average asking rents continued their slide.
The current real estate slump continues to be one that is dictated by lack of demand. This is significantly different than past Orange County real estate recessions where supply increased as quickly as demand decreased. At the end of the second quarter, the vacancy rate for manufacturing and warehouse space was 4.8% and research and development was 3.1%. These rates were unchanged from the first quarter and significantly lower than the office vacancy rate of 16.2%.
This is positive news for OC industrial real estate owners. The downside, however, is that demand is painfully low. At the end of July, California’s unemployment rate reached 12.1%, the only time since the 1982 recession and the Great Depression that it has exceeded 10%.
While OC’s unemployment rate was 9.5%, much more in line with the 9.7% national average, it was still not a positive factor for industrial real estate demand and it seems likely that OC employers will continue to reduce costs by cutting labor.
This lack of demand is putting some landlords in a competitive environment when it comes to attracting tenants. The longer a property sits on the market, the more aggressive landlords become in their efforts to fill their empty buildings. As a result average asking lease rates have continued their slide dropping to 56 cents per square foot for manufacturing and warehouse and 68 cents per square foot for research and development.
With pricing at its lowest level in years one would think tenants would be locking in long term leases. So far, this has not been the case. In an effort to minimize risk, companies have delayed in making long-term real estate decisions that so dramatically impact their balance sheet. So even though pricing for industrial properties is as low as we have seen in years, companies are not willing to take advantage of the opportunities.
If tenants do start to take advantage of low lease rates and landlord concessions, 2009 will finish much better than it started. As we move through the third quarter we have reason to be optimistic for the first time this year. While there have not necessarily been more completed leases, activity has been picking up and this is good news for our market.
Ward is a senior associate in the Anaheim office of CB Richard Ellis Group Inc.
