Real Estate Watch: North County
Strong Fundamentals Keep North County Stable
By STEPHEN BATCHELLER
While the North Orange County industrial market has been fortunate not to feel the effects of Sept. 11 and the national recession as severely as some regions, it has not been immune to the downturn.
Like other areas, North County saw a reduction in gross absorption, which peaked in 2000 when the national economy reached its zenith. Total gross absorption fell 22.8% to 4.2 million square feet in 2001 compared to a year earlier. Annualized gross absorption through May was running at a pace of 3.9 million square feet, a 7% reduction.
But current user activity is far greater than it has been since the second quarter last year. We expect to see a big increase in both gross and net absorption in the third and fourth quarters. Remarkably, the area’s industrial vacancy rate remains very low at 3.2%.
As a result, despite the drop in gross absorption, lease rates in most size categories have not declined much. And there are several big demand needs in the pipeline which, when consummated, will increase absorption levels and reduce vacancy rates.
Some areas such as northern Anaheim, Brea and Fullerton have developed pockets of research and development facilities. But most North County space is industrial, with an industrial base of 94.8 million square feet and a research and development base of 9.4 million square feet.
The area has a reputation as one of the most desirable and stable industrial markets in the U.S., with an excellent labor base and superb transportation enhancing the stability. With available land in tight supply, the ability to build new class A space to meet demand is limited. So new or existing class A space has a big competitive advantage and tends to sell or lease very quickly at higher rates than the rest of the market.
This is particularly true for class A buildings for sale with 40,000 square feet or less, which is the single most active segment of the market.
What can be expected in North County for the rest of the year?
Supply will remain limited despite an increase in space available for sublease. Demand will remain stable for buildings less than 50,000 square feet. Prospects for larger buildings will start to increase and activity in this segment will increase in the third and fourth quarters. Owners will continue to be aggressive in attracting tenants in the face of national economic uncertainty by using concessions and broker incentives to lease space.
User sale activity will remain the strongest part of the market, as long as interest rates remain near historic lows.
Investment demand will remain strong, due to a shortage of investment properties for sale and the market’s strong fundamentals and historic stability.
Batcheller is a senior vice president with the Institutional Industrial Group for CB Richard Ellis in Southern California.
