It’s a wait-and-see environment for Orange County’s industrial market.
Confusion in the financial markets has made some investors gun-shy about doing deals,even if they can get loans at terms they’re happy with. Big lease opportunities are nearly nonexistent for tenants seeking vacant space. And a lack of land has stalled new development leaving builders searching for existing campuses to buy and redevelop. So market players are in a holding pattern.
“Every summer, people (in the industry) think things might be slowing down,” said Jeff Chiate, senior director for the Irvine office of Cushman & Wakefield Inc. “But this year, there’s a lot more questions about how the market will (react) at the end of summer.”
It’s still a strong market, with long-term trends favoring the area, Chiate said. Local industrial property sale prices rose nearly 14% in the past year, and vacancy rates in the county remain low, near 4%. Meanwhile, owners are pushing rents upward.
That said, there’s more uncertainty in the market than anytime in recent years, industry watchers say.
“A lot of people we do deals with are saying, ‘We’ll see you in October. We’re going to step back for a while,'” said Bob O’Neill, investment officer for the Irvine office of Chicago’s First Industrial Realty Trust.
“There’s a lot of fear in the market, fear of the unknown. But fear brings opportunity,” said O’Neill, whose company has been involved in some $75 million of local acquisitions and sales in the past few weeks.
Confusion in the lending markets is a primary cause for concern these days. Like in the housing market, loan terms for commercial real estate deals are becoming more stringent. Interest-only loans for deals have been squeezed out of the market in the past 60 days, investors said.
Conduit loans,those that are pooled with other loans and then sold as a bond or other offering,no longer are being made for larger deals, and the only lenders making loans these days are life insurance companies, said Robert Neal, managing partner for Newport Beach’s Hager Pacific Properties, a privately owned real estate investment company.
Also, borrowers have been hit with higher interest rate requirements in the past three months, up from 120 basis points over the 10-Year Treasury notes to 180 basis points, Neal said.
A few weeks ago, some lenders “weren’t even bothering to price loans for a couple days. That’s never happened before. There’s a lot of extreme behavior in the market right now,” Neal said.
That hasn’t scared off investors like Hager Pacific, which owns about 1.2 million square feet of space in the county. The company just completed a deal earlier this month, buying a 65,000-square-foot industrial building in Anaheim for about $6 million. It was Hager Pacific’s first acquisition in the county in nearly three years.
Expo Dyeing and Finishing Inc., a textile dyer, occupies the Anaheim building under a long-term lease.
Tenants are the ones bearing the brunt of investors’ and lenders’ nerves.
After years of projections about double-digit rent increases, the changes started to take place last year. Rental rates for industrial property in the county increased more than 12% in the past year, according to data from the Irvine office of Colliers International. The average monthly asking rate for all types of industrial space now stands at about 73 cents per square foot. Monthly rents run $1.08 per square foot in South County, making it the most expensive submarket in both Los Angeles and Orange counties.
It’s not just OC seeing the rent increases. An even tighter market for industrial space in Los Angeles has pushed up rents for warehouse and distribution space there to 67 cents per month,the same overall rate as in OC for that type of space.
Rental growth in Los Angeles has been curbed in previous years by the availability of industrial space in the Inland Empire, which runs some 25% to 30% cheaper than in OC and Los Angeles. And many smaller tenants opted to buy their own space, rather than rent.
Those factors are less of an issue today. Now, most tenants who could move their distribution and warehouse inland already have done so, leaving the remaining companies with few options.
“Most bulk retailers have left the market,” said Clyde Stauff, Colliers senior vice president.
Rising interest rates and difficulty finding financing also are expected to put a damper on the for-sale market in the near term, industry watchers say.
Developers continue to turn their attention to higher-paying uses. In OC and Los Angeles, there’s less than 850,000 square feet of industrial space under construction, according to data from Colliers, with some industrial land being rezoned for housing or mixed-used developments.
“That’s the lowest it’s ever been. It’s largely due to the lack of available land,” Stauff said.
If you can find it, land zoned for industrial projects in North OC runs about $30 to $35 per square foot, while in South County land prices run from $45 to $55 per square foot.
The biggest area ripe for industrial development should have a new owner late this year. In Anaheim, Boeing Co. is expected to finalize a sale of more than 100 acres of land it owns in the city’s core industrial area, known as The Canyon. The defense and aerospace company said last year it was planning to shut down and sell its sprawling operations and move about 3,700 employees to its Huntington Beach facility. A small number of potential buyers are said to be eyeing the site.
The sale will include about 18 industrial and office buildings totaling more than 1 million square feet. Interested buyers,expected to be well-capitalized private equity firms, real estate investment trusts and pension fund-backed investors,would likely redevelop most of the older, 1960s-era properties on the site. Irvine-based Boeing Realty Corp. is set to handle the sale of the buildings and land.
If you’re a tenant looking for big blocks of space in OC or L.A., and can’t wait for new buildings to be built, good luck. There are only six class A industrial buildings that are more than 200,000 square feet up for lease in the two counties, according to Stauff.
Among those is the 350,000 square feet of space in Brea being vacated by Nature’s Best, a distributor of vitamins, supplements and health food. The company said earlier this year it was moving its warehouse operations to Chino, although it will keep some office space and headquarters in Brea.
Nature’s Best signed a $25 million, 10-year deal for a 409,588-square-foot warehouse at the Watson Commerce Center in Chino.
Also seeking a tenant: a 366,629-square-foot industrial facility in Santa Ana, next to the Tustin Legacy development. Newport Beach-based development and investment firm Greenlaw Partners and partner Commonfund Realty Inc. of Wilton, Conn., just bought the largely vacant property, located at 2001 to 2007 E. Dyer Road (see story page 91).
First Industrial bought the property early this year with an eye on repositioning the facility; Greenlaw Partners will continue with that strategy, said First Industrial’s O’Neill. The lack of competing, available area properties played a big part in the building’s $46.5 million sales price. First Industrial reportedly paid $35 million to $40 million when it bought the property in January.
Another one of the few available spaces catering to larger users was taken off the market in the past month.
Medical device maker B. Braun Medical Inc. signed a five-year deal for 260,000 square feet of warehouse space in Westminster, in one of the larger industrial leases the county’s seen of late. B. Braun, a unit of Germany’s B. Braun Melsungen AG that employs about 1,300 people in OC, is moving some of its operations from Irvine to the new space. It plans to use the building at 7300 Hazard Ave. to store finished products. The lease was valued at $9.5 million.
