By IAN BRITTON
North and Central Orange County’s industrial market continues to thrive despite recent whispers of a slowdown. The evidence: Vacancy rates are declining, rents are increasing, leasing activity is on the rise and sale prices continue to set new records.
Asking lease rates have been rising in all size ranges from 10,000 square feet to 100,000 square feet and greater.
The market heavily favors landlords, with tenants needing to move quickly to control their real estate expenses. Substantial rate increases are expected in the coming months as the supply of quality buildings dwindles.
The county’s neighbor to the north, Los Angeles, continues to boast the lowest industrial vacancy rate of all major metropolitan submarkets at about 1%.
North and Central OC are perceived to offer a safer home for businesses and clearly have benefited as several larger tenants have moved south.
North County’s third-quarter vacancy rate was 3% and is tightening. Tenant improvement allowances and concessions from landlords are phasing out due to the lack of supply and increasing tenant demand.
North and Central County is home to more than 50% of OC’s manufacturing and warehouse sector.
New jobs are being created in a variety of industries, including electronic components, aerospace and medical devices. The diverse local economy gives business owners access to an array of vendors as well as a solid labor pool.
Local small businesses see the long-term value of the area and continue to take advantage of low interest rates to buy property.
Competition is fierce and sale prices for buildings in the 10,000- to 50,000-square-foot range now average more than $145 per square foot.
Limited developable land, coupled with the trend of rezoning industrial land to residential, have made existing quality buildings more attractive. Demand will continue to remain strong as construction costs continue to rise beyond the level of lease rate growth.
Industrial land prices now are higher than $30 per square foot and buildings being offered for sale will remain the hot spot in the market.
Several business owners who own their buildings are taking advantage of the hot industrial market and flow of investment capital into the industrial sector.
Owners have been signing five- to seven-year leases and selling the leased investment. As cap rates dip below 6.5%, business owners are able to sell at record prices while negotiating favorable leaseback terms.
This strategy allows owners to invest the equity from the property back into their core business where the capital can be better used.
As the Urban Land Institute recently suggested, real estate should retain its edge over the stock market and increased cash flow from rising rents in most markets will offset any minor increases in cap rates in the near term.
Britton is a vice president in the Anaheim office of CB Richard Ellis Group Inc.
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