Orange County’s industrial sector posted a strong first quarter with consistent levels of activity and tightened vacancy rates.
Combined with attractive living conditions, modern buildings and a strong labor base, OC continues to be a lucrative and ideal location for investors and developers.
While the stamina of OC’s industrial base remains to be seen in the coming quarters, the first quarter results suggest a healthy market.
There is more than 800,000 square feet of industrial space under construction, up about 20% from a year ago.
There was 552,032 square feet of positive net absorption in the first quarter, coming on the heels of 340,000 square feet of absorption in the fourth quarter.
The result: OC’s industrial vacancy rate remained low at 3.3%, bringing the total amount of vacant industrial space to 8.2 million square feet.
Both the manufacturing and warehouse, and research and development sectors saw positive net absorption in the first quarter, with vacancy at 3.2% and 4.1%, respectively.
There was 2.5 million square feet of gross activity in the first quarter, down 23% from the fourth quarter.
The manufacturing and warehouse sector accounted for 77% of the total lease and sale activity in the period.
North County represents 44% of the total industrial base but accounted for 36% of gross activity in the first quarter.
The tightened vacancy and availability rates, combined with steady construction activity, contributed to the incremental increase in lease and sale rates in the first quarter.
The average asking lease rate for industrial space was 63 cents per square foot in the first quarter,a 1-cent increase from the prior quarter.
The average asking sale price was $140.75 per square foot, up more than $7 from the prior quarter.
Net Absorption
OC has posted positive net absorption for three consecutive quarters. Net absorption in the first quarter was 552,032 square feet. The accompanying low vacancy and availability rates suggest a tight market.
West County was the only local region to record negative net absorption,141,405 square feet. The John Wayne Airport area and South County emerged from negative net absorption in the fourth quarter to end the first quarter at positive 40,966 square feet and 356,741 square feet, respectively.
The manufacturing and warehouse sector saw positive net absorption of 260,921 square feet. Similarly, the research and development sector ended the quarter at positive 291,111 square feet.
Vacancy
Vacancy and availability rates stayed low in the first quarter amid strong gross activity in OC.
The vacancy rate was 3.3% in the quarter, with about 8.1 million of the county’s 245 million-square-foot industrial base vacant.
The vacancy rate in the manufacturing and warehouse sector was 3.2% in the quarter. At 2.6%, manufacturing and warehouse buildings in North County had the lowest vacancy rate in OC.
The research and development sector recorded a 0.7% decline in vacancy from the past quarter to 4.1% in the fourth quarter.
The airport area’s R & D; market posted the lowest vacancy rate of 2.9% in the sector.
Industrial availability was 6% at the end of the first quarter.
Lease Rates
The declining supply of industrial space coupled with ongoing demand drove the overall average asking lease rate up 1 cent to 63 cents per square foot in the first quarter. It was the third quarter in a row that rents rose.
Rents in the manufacturing and warehouse submarket were flat during the quarter at 57 cents per square foot. The R & D; sector recorded a 1-cent increase in rents in the period.
Construction
With 28 buildings totaling 804,134 square feet under construction in the first quarter, OC continued to be a lucrative market for developers and investors.
The manufacturing and warehouse sector accounted for about 88% of construction in the industrial sector.
West County accounted for 50% of construction, followed by 22% in the airport area, 14% in North County and 13% in South County.
In West County, 217,300 square feet of industrial space was completed in the first quarter. North County added 10,960 square feet.
Data and analysis by CB Richard Ellis Group Inc.
Industrial On the Rise
Orange County isn’t that much smaller than the Inland Empire in terms of industrial development.
OC has about 250 million square feet of industrial space, versus 320 million square feet in the Inland Empire.
But there is a difference in each area’s development pipeline.
The Inland Empire has more than 20 million square feet of industrial construction planned, while OC has about 1 million square feet in the pipeline, with most of it aimed at smaller owner-users.
That lack of construction, combined with healthy demand, has pushed OC vacancy rates down 10% from last year’s levels, to just 3.3%.
Industrial lease rates, which have been relatively flat in the past year, are bound to jump soon, brokers said.
“There’s going to be a significant shift,” said Ben Seybold, senior vice president for the Anaheim office of CB Richard Ellis Group Inc. “We’re looking at a big spike in rates, and it is going to happen this year.”
It is surprising that rates haven’t already taken off, said William Halford, chief executive for Bixby Land Co., a Newport Beach-based developer that focuses on the industrial sector. “It’s a real question as to why more (industrial landlords) haven’t shown up at the party.”
The average industrial lease rate in OC has actually dropped a penny in the past year, to 57 cents per square foot. That’s a bit misleading, Seybold said.
“The vacancy rates are so low that the rental stats are dependent on what types of properties are available,” Seybold said.
Little is available.
Tenants are being forced to take space at second- and third-tier properties, when they would prefer new space.
Despite interest from tenants, don’t expect industrial developers to follow the office sector’s lead and increase construction.
Most developable land continues to be re-entitled for more profitable uses, including residential, particularly in Anaheim’s Platinum Triangle and the Irvine Business Corridor.
OC “is a land-constrained market. If there’s going to be development, it will have to be small buildings,” Seybold said.
Among the few larger projects in the works, Gardena-based Overton Moore Properties is planning to spend $110 million to build 10 buildings, totaling 830,000 square feet, at the Gateway Business Center in Seal Beach.
,Mark Mueller
