By IAN BRITTON
It is no secret that the overall real estate market is in a state of change brought about by the crash of the subprime mortgage industry. Many think that the full extent of the impact may take six months to truly unfold.
But as lending terms have tightened and the cost of debt has increased, the robust price increases we have been seeing for the past several quarters may temper a bit in coming months.
Has the industrial sector in North Orange County truly been impacted though? The market fundamentals are still healthy as the vacancy rate remained at 2% and lease rates have increased 15%.
Lease rates for manufacturing and warehouse space 10,000 square feet and larger averaged 60 cents per square foot per month.
North OC continues to be viewed as one of the most desirable markets in the country by both investors and tenants. Despite the turmoil in the financial markets, investors continue to stretch their money to buy product in this market due to its attractive location, diverse tenant base, skilled labor pool and sound infrastructure.
As an example, Orchard Properties from Northern California purchased the former Young’s Market corporate headquarters building (221,000 square feet at 2164 Batavia in Orange) with a short-term leaseback in place for $125 per square foot at a 5.9% capitalization rate.
Orchard beat out several local investors and developers because it was willing to accept a lesser short-term return. The company expects long-term rent growth from a quality asset.
New construction was down from second quarter 2006, a direct result of the lack of industrial land. Demand on the owner-user side is still strong across all size ranges. Costa Mesa-based Burke Development recently completed a 23-building development in La Habra with units ranging from 2,100 square feet to 13,500 square feet. Most were put under contract prior to completion of the project and only seven buildings remain. Pricing varies according to size and percentage of office area included in the industrial product, but asking prices range from $185 per square foot to $260 per square foot.
A majority of space being developed in the past two years has been in the 8,000-square-foot to 15,000-square-foot range, catering to small businesses that want to own as opposed to lease. With land values in the $30- to $35-per-square-foot range, this is the only type of space able to justify the cost of OC’s expensive infill land parcels.
Most of that product has been absorbed at a record clip, but as businesses expand there are few larger, quality buildings available for growing companies to move into. In fact, there are only 23 existing class A buildings 100,000 square feet and greater throughout all of North OC’s 110 million-square-foot industrial base. Lease rates for this type of space are now 65 cents to 68 cents per square foot. About 60% of the industrial property available for sale or lease right now was built prior to 1980 and most of these buildings have functional deficiencies (low ceiling clearance, limited dock loading, lighting) and will take longer to be absorbed.
Britton is a first vice president in the Anaheim office of CB Richard Ellis.
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REAL ESTATE WATCH CHARTS
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