The North Orange County Market continued to relax from the fast-paced activity seen this time last year as local companies responded to the economic downturn by scaling back on expansion and relocation plans. Companies clearly are taking a more conservative approach to real estate and are leasing only immediately required space. In fact, a common theme among larger industrial users has been subletting a portion or all of the previously acquired expansion space in their existing buildings.
Due to the uncertainty of the economy, the recent utility crisis, slower job growth and a volatile stock market, overall demand has slowed for local manufacturers. The so called “tech wreck” has continued, but orders have even dropped in the usually strong medical, dental and electronics industries.
However, due to the diverse nature of the North Orange County economy, we are able to be optimistic. Chapman University reported that orders for defense, aircraft and transportation related equipment are up 25% from this period last year, and predicts a further 20%-to-25% growth in defense spending levels from mid-2001 to mid-2002. Defense related jobs are predicted to increase by 0.75%, which would help offset the effects of the tech slowdown.
The industrial market in North County remained healthy in the second quarter. In a market that consists of more than 105 million square feet, only 1.0% is actually vacant and 6% is considered available. Demand remains strong, as average lease rates are in the 54 cents per square foot per month, triple-net, area and the limited infill land parcels are consistently trading in the $14-to-$16 per square foot range. Developers of new Class A industrial products are barely keeping up with demand as most of the new projects in the 20,000- to 40,000-square foot range are being absorbed prior to completion; leaving only older, more functionally obsolete product on the market.
In light of the recent drop and continued fluctuations on Wall Street, investors have begun to revert back to the consistent and stable returns of industrial real estate. We are at a very interesting point in the industrial real estate cycle, labeled by Torto Wheaton Research as the “mature phase,” in which slowing demand and minimal or even negative net absorption occurs. With limited supply in North Orange County, investor demand still remains very strong among both industrial investors and trade buyers.
But what does being in the mature phase mean for industrial real estate over the next 12 to 24 months in North Orange County? We believe there is the potential for the market to enter the declining phase of the cycle, typified by increasing vacancy rates at best, and stagnant rental rates and sale prices. This could be caused by continued poor performance across the board in the manufacturing sector. Plant utilization is at its lowest level since 1982 and with continued news of layoffs, we don’t anticipate positive change for the manufacturing sector in the short term.
Still, the long term outlook remains healthy. We believe lease rates and sale prices will moderately increase as existing inventory is improved to meet the market’s needs.
Analysis by Ian Britton, sales associate in the Anaheim office of CB Richard Ellis, with supporting information provided by CB Richard Ellis’ Global Research and Consulting.
