ORANGE COUNTY
The end of the millennium has finally arrived, and finds the Orange County industrial market in the best of health. The economy has injected tenants and investors alike with a bullish attitude that has stimulated feverish demand across submarkets.
Consistent demand paired with sound real estate fundamentals produced feverish market activity in 1999 and supported stabilized availability, offsetting millions of square feet of new construction. As we head into 2000, economic indicators remain strong, both nationally and locally, perpetuating the longest period of expansion in U.S. history. GDP (Gross Domestic Product) increased 5.8% at an annualized rate during the fourth quarter of 1999, rising well above analysts’ predictions. The economic revival in Asia has caused exports and imports to skyrocket, contributing to the strong GDP and boding well for the burgeoning high-tech communities of Orange County. The Los Angeles Customs District reported the value of exports up 10.5% in December, the fourth consecutive month of double-digit increases. Import containers, meanwhile, were up 14.5% at the Port of Los Angeles for the year.
Additionally, unemployment in California remained at its lowest level since 1969, at 4.9%. Locally, the Orange County unemployment rate plummeted to a record low 2.1%, with marked improvements seen in the services sector. For the year, more than 40,000 jobs were added to the local economy. On the residential side, the median sale price for a home in Orange County rose 9.9% over the year to an astonishing $286,950. This remarkably positive economic momentum fueled demand in the Orange County commercial real estate market during 1999, and should maintain the charge well into 2000.
The fourth quarter placed an exclamation point on the story of the Orange County industrial market in the past two years. Market activity improved upon the impressive levels achieved during the previous three quarters, to nearly 4.9 million square feet. For the year, overall sale and lease activity shot up to more than 13 million square feet, an increase of 37% over the impressive figure posted in 1998.
The figures are especially impressive considering the lack of quality available space. Many buildings that are currently available are functionally obsolete or environmentally contaminated. Sale opportunities and available “big-box” distribution product (100,000 square feet and above) are especially rare in the Orange County market. In the fourth quarter, countywide manufacturing and warehouse availability tightened to 7.6%, with significant improvement noted in the North County submarket. New construction is unlikely to relieve pent-up demand, as the limited supply of available land moves toward R & D;/flex development.
Construction currently stands at a little more than 1.1 million square feet, which is only half the total at the end of 1998. South County, possessing the largest amount of available land, leads the county with more than 750,000 square feet of new construction.
The tightening market has also led to escalating lease rates and sale prices. Overall median triple-net lease rates stand at 54 cents, a 4% increase over the third quarter. Significant demand in the Airport Area submarket has caused lease rates to swell by more than 7%. Rising rates and the lack of quality available space, both in Orange County and much of the Los Angeles basin, may soon lead companies to explore opportunities in the wide-open and increasingly accessible Inland Empire market.
Looking at the submarkets, year-end activity soared in the Airport Area and South County. The Airport Area witnessed more activity than any other submarket in Orange County, with more than 1.3 million square feet of product being absorbed on a gross basis. This tripled the activity measured in the third quarter and was a 75% increase over the fourth quarer of 1998. Airport Area lease rates felt the upward pressure of demand, rising 4 cents over the quarter to 58 cents, triple-net. With little to no available land for industrial development in the area, look for the current availability rate of 7.4% to fall while lease rates continue to climb during 2000.
The flex craze continues to dominate the development headlines in the South County submarket. Demand for traditional industrial space, meanwhile, is building, especially for “big box” product and buildings for sale. Current construction in South County, at 760,000 square feet, will do little to alleviate demand in the long term, but should provide several sale opportunities in the short term. At the moment, the South County submarket has the shortest supply of buildings for sale in the county, at 150,000 square feet. Activity, however, increased to almost 540,000 square feet in the fourth quarter, as a result of some newly completed space, showcasing sustained demand in the submarket. The relatively high availability rate, at 13.3%, will begin a steady decline in 2000, as construction decreases and new space is absorbed. Lease rates in the South County, which increased more than 18% this year to 71 cents, will continue to increase with demand well into the coming year.
The North, Central and West County submarkets mirrored the success of the Airport Area and South County with more than 3 million square feet of fourth-quarter activity. The three submarkets are more mature and almost completely built-out. Ongoing economic redevelopment and infrastructural enhancement projects will soon be followed by modernization of many old and functionally obsolete projects throughout the submarket areas. Redevelopment will steadily increase tenant demand in these traditionally industrial regions well into the next decade.
North County enjoyed a particularly positive quarter to end off the year. Availability dropped two full percentage points, to 6.5%, thanks to more than 1.1 million square feet of activity. Owner/user activity in smaller industrial space went through the roof last year, as private investors gained more confidence in the market. The North County submarket enjoyed the fruits of this demand, in part, during its fourth-quarter rally. Lease rates have increased 11% since the beginning of the year, and should continue to rise as available space disappears.
The Central County submarket recorded substantially stronger activity for the year as compared with the final statistics for 1998. Fourth-quarter activity actually declined from the impressive 1.6 million square feet that changed hands during the thrid quarter. Bolstered by several sizeable lease deals, activity once again topped 1 million square feet. Availability is still the tightest in the county, at 5.8%. With limited new construction, Central County should remain tight and continue to tighten into the next year, as its 51-cent lease rates remain attractive.
Activity nearly tripled in the West County submarket during 1999. Assisted by a strong showing in the fourth quarter (800,000 square feet), activity reached more than 2.4 million square feet. Availability tightened to 8.4%, with median lease rates coming in at an even 50 cents. West County construction will remain at a minimum in 2000 because of the lack of available land. However, the submarket’s strategic location ensures the continuance of demand.
Countywide, persistent demand has outpaced he ability of developers to locate available land on which to build new industrial space. In addition, the high-tech explosion will continue in South County, further limiting the amount of new distribution and warehouse product. The issuance of industrial permits, at year-end, was down 47% from last year. With sunny economic skies predicted and bullish demand in the marketplace, 2000 should continue the trend toward heavy activity, decreased availability, and rising lease rates and sale prices. Alternative markets may become more attractive as quality available space steadily disappears in the tight Orange County market.
OTHER AREAS
The Los Angeles industrial market will continue to generate increased demand for space as a robust economy drives the demand for durable goods and a population of 10 million generates demand for non-durables. Steady activity is expected to continue, while vacancy throughout the market next year will warrant lease rate and sale price increases across the board. Lease rates are forecast to increase by five percent or more, driven chiefly by the economics of such a tight market.
The Inland Empire industrial market continued on its steady course during the fourth quarter, showing very little change from the previous year. Sale and leasing activity again topped the previous year’s record, setting a new and final high-water mark for the ’90s. Even with continued strong tenant interest, and upticks in BTS and owner-built projects, vacancy rates remained unchanged due to the large amounts of completed construction hitting the market at the end of the year. The healthy premising numbers are not allowing the rates to push upward as might be expected.
With total industrial absorption surpassing 5.5 million square feet for the year, San Diego more than doubled the 1998 total. More than 5.8 million square feet of new industrial and R & D; space was completed in 1999, partially accounting for an 11% vacancy rate. Poway led all submarkets with 1.3 million square feet of absorption.
