By JEFF CARR
The commercial real estate market in South Orange County,Irvine to San Clemente,has remained healthy despite a weak housing market and the highly publicized subprime mortgage market woes.
The industrial market remains tight as increasing land values have slowed construction, keeping the number of new projects at a minimum.
The South Orange County industrial vacancy rate was 3.3% in the second quarter, down from 3.7% in the first quarter as well as 12 months ago.
The strongest segment of the sector has been warehouse distribution space. The sector’s seen a spike in both asking rates and sale prices with space remaining extremely low. The average asking lease rate stands at 93 cents a square foot, a 12 cent increase from the first quarter.
Sale prices for this sector rose $4 to $204.58 per square foot.
The research and development and the small-building-for-sale markets have slowed and the time to lease or sell these properties has increased. The value of these properties remains stable.
Office Market
On the flip side, the office sector is seeing substantial construction and second generation space returning to the market due to the shakeout within the subprime mortgage industry. The office vacancy rate in South Orange County was 9.7% in the second quarter, versus 8.4% in the first quarter and 5.6% a year ago.
Expect vacancy to increase during the next two quarters due to the completion of several office buildings. In addition, a substantial amount of sublease space entering the market is having a negative impact on the leasing activity for direct deals.
Overall, there’s more available space and fewer tenants in the market due to many landlords becoming more aggressive on renewals. Asking lease rates, however, continue to increase. The average asking lease rate for South Orange County office buildings was $2.76 per square foot in the second quarter, up 32 cents from a year earlier.
Other Factors
There are fewer 1031 exchange and tenant-in-common deals in the market so there is less competition for available investment properties. This coupled with rising interest rates are pushing capitalization rates,the rate of return in the first year of ownership,slightly higher.
Cap rates for industrial space were at 6% to 6.5% and for office at 6.5% to 7%. Larger portfolio sales of quality buildings have traded as low as the 5% to 5.5% cap rate range. Industrial multitenant buildings remain the most popular investment property throughout South Orange County.
Carr is a senior vice president in the Newport Beach office of CB Richard Ellis Group Inc. Data and analysis provided by CB Richard Ellis Research.
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