By ZACH NILES
The woes of the housing market spurred by the subprime mortgage meltdown have had drastic effects on some commercial real estate space, but have left others unscathed.
Office space has bore the brunt of the collapse with the private client and institutional investment sectors scaling back too. But industrial continues to hold its own on both the lease and sale fronts.
Vacancy increased in the office sector to 11% at the end of 2007, a 58% increase from the previous year’s rate of 7%. Annual net absorption for 2007 totaled a negative 997,913 square feet, of which 706,833 square feet, or 70.8% of the negative absorption, was recorded in the fourth quarter alone.
Large blocks of new space dot the landscape and continue to sit with little or no activity. The average asking lease rate has yet to decline but leasing incentives such as initial free rent and tenant improvement allowances have become standard and quite significant as owners try to lure tenants without drowning their long-term net operating income.
What does this all mean? Expect to see office lease rates decline throughout 2008.
In the industrial sector vacancy remains unchanged from the previous year at 2%. Absorption statistics as a barometer for market conditions with such a low vacancy rate is not appropriate because the supply of product to absorb is limited. Even so, 130,941 square feet of absorption was recorded in 2007.
The average asking lease rate increased 4 cents to 63 cents per square feet a month on a triple-net basis, a 6.8% increase from the previous year.
Orange County’s centrally located, land-constrained environment will continue to provide downward pressure on vacancy rates and keep it insulated from the struggles other industrial markets have been exposed to.
Owner-users continue to absorb the small-building-for-sale program that so many of OC’s industrial developers have subscribed to since 2003, though activity throughout the fourth quarter was softer than previous quarters.
Sale Statistics
The average asking sale price increased 5.3% over the previous year to $176.88 per square foot. A CoStar Group Inc. survey shows significant transaction volume growth in 2007 from 2006. Some180 industrial sale transactions were reported for North Orange County in 2007 as opposed to 117 transactions in 2006, a 53.8% increase. Such an increase can be attributed the delivery of new construction deliveries that relieved pent-up demand.
Loan qualification guidelines have become more stringent but conventional and small business administration lenders continue to fund loans. Foreclosures are nearly non-existent.
Industrial developers remain optimistic evidenced by recent notable land acquisitions. Panattoni Development Co. acquired 60 acres of Boeing Co.’s Anaheim operations in December and intends to phase construction and rehabilitation of certain existing structures in the next four years. Burke Development Co. recently broke ground on a new 3.6-acre project in Brea aimed at industrial users with heavier office requirements. Land values in North and Central Orange County exceed $30 per square foot and will certainly grow as land becomes an even greater scarce resource.
Niles is a first vice president in the Anaheim office of CB Richard Ellis.
The Real Estate Watch Chart – Net Absorption, Rates, etc. is provided in a Adobe Reader .pdf print-friendly file.
CLICK HERE
to download
REAL ESTATE WATCH CHARTS
Please note: to download the file, you will need Adobe Acrobat Reader installed on your computer. For a free copy of the software,
click here.
