ORANGE COUNTY
California’s energy crisis, dot-com layoffs, and bankruptcies continue to leave Orange County’s economy in a state of uncertainty. The series of Federal Reserve interest rate cuts and the arrival of tax rebate checks in the third quarter should spur consumer spending and add to California’s Gross State Product by the end of the year. The Orange County unemployment rate edged up a bit in the second quarter, to 3.0%, but should remain relatively low until the economic picture becomes clearer. Although most economists are pointing towards moderate growth late in 2002, UCLA’s Anderson School of Business has stated that California could slip into recession as a result of problems relating to energy.
Despite the continuing stream of bad economic and employment news in the media, the Orange County Industrial/R & D; market managed to stay relatively active during the second quarter, with total activity for the year in the manufacturing and distribution uses actually ahead of the corresponding year-ago period. However, activity volume in the R & D; segment was down significantly from the first quarter, and as a result the combined year-to-date activity volume was off by 13.6% from the corresponding period in 2000.
A major share of construction in the county’s industrially zoned areas in the past 12 months has been in the flex office configuration (which Grubb & Ellis tracks as part of the office segment), and there has been relatively little new traditional Industrial/R & D; inventory added to the county’s stock. Thus, while the combined manufacturing and distribution and R & D; activity was off from a year ago, the level of activity and the small amount of new inventory actually resulted in a lower overall availability rate than in the prior quarter.
Owner-user demand for small for-sale product is still strong, especially in North County. However, companies looking for large warehouse-distribution facilities have been forced to go outside the county, into southern Los Angeles County or the Inland Empire.
Other notes:
–R & D; construction in the second quarter slowed considerably as landlords moderated construction to stay consistent with market demand.
–Second-quarter construction of manufacturing-distribution space in all Orange County submarkets increased from the first quarter.
–The South Orange County and Airport Area submarkets were the only ones with R & D; construction in second quarter.
–As more tenants hold off plans to expand operations, the R & D; median lease rate decreased in the Central Orange County submarket in the second quarter.
–As transaction velocity slows, and the OC marketplace becomes more challenging, landlords are changing pricing strategies.
–The West Orange County submarket witnessed a lowering in the median lease rate in the second quarter, as supply increased and business conditions became less favorable.
–As business conditions deteriorated in OC, activity decreased in the second quarter among industrial buildings in the 10,000- to 50,000-square-foot range.
–Warehouse-distribution buildings ranging from 10,000 to 49,999 square feet accounted for more than 50% of the county’s second-quarter activity.
Bakersfield: Demand for finished product remains stable. Lease rates have not increased overall, however newer product is obtaining increased rates. Tejon Industrial Complex on I-5 has completed the first phase of a 1.9 million-square-foot distribution center for IKEA, and a 650,000 square foot spec building will be completed in November.
Inland Empire: This maturing industrial market posted healthy lease and sale activity into mid-year, but second-quarter activity was off from the year-prior quarter. The slowing national picture caused some larger-profile deals to take longer to close. In addition, users that are buying vs. leasing product appear to be more cautious than earlier in the year. However, the recent downsizing and mergers taking place on the warehouse-distribution side of the business have been a plus for this market. Since this market contains many 200,000-plus-square-foot projects, it can accommodate the national trend toward consolidation that started late last year. All these factors,less expensive rates, new large-scale projects and land available for expansion,should help buoy this young industrial market moving forward into uncertain economic waters. Also on the positive side, the area posted a robust 9.6 million square feet of speculative activity. Additional build-to-suit and owner-built projects continued to break ground in second quarter, but at a more paced level than in the past few quarters. The new product continues to spread east into Riverside, Redlands, Colton and Corona.
Los Angeles: The Los Angeles industrial market has remained relatively stable with a low vacancy. From about the fourth quarter of 1998, it has been able to hold on to a vacancy rate of less than 5%. Last year, the Los Angeles Industrial Market benefited greatly from the general economic expansion, which triggered the construction of larger facilities in several markets,buildings larger than 100,000 square feet. Now, at mid-year, reflecting lower activity as part of the “slower” macro-economic conditions, an increase in available industrial product is a dark cloud looming overhead. The availability of industrial product stands at about 7.7%. There are watchful accounts of new buildings sitting available for lease in the South Bay and San Fernando Valley submarkets (for more on the Los Angeles market, see page 64).
San Diego: Mid-year statistics provide mixed signals about the health of the San Diego industrial market. The vacancy rate continued its decline, to 6.7 %, net absorption was 1.4 million square feet for the first half of 2001, and new construction equated to only 2% of the total inventory. However, sublease space surpassed 2 million square feet, net absorption was down by 64% from last year, and several tenant categories, including telecom, have virtually vanished. n
