The county’s industrial market hit a somewhat sour note in the final act, a disappointing development following a stellar first half of 2017.
The root cause can be traced back to not one, but a series of poorly timed events and demolished buildings over the last six months of the year. But that shouldn’t be taken as a sign of bad things to come; the market is still tremendously tight on available space, and gross activity remained on par with past years.
Even with some late-cycle caution, the market remained in the landlord’s favor, with constant demand and a shrinking base.
Moving into this year, the market will have a new chance to shine, as occupancy gains and rental growth are projected to best 2017 results.
Lease rates at the end of the quarter closed at 88 cents per square foot, up 1 cent from the third quarter. Year-over-year, lease rates rose 4.8% due to an imbalance between available supply and demand. The lack of class A product caused class B product lease rates to increase significantly during the year. Steady demand and constricted supply prompted most landlords to offer fewer incentives due to high competition among tenants, so they offered concessions at their own discretion.
Given market conditions shouldn’t change much this year, we predict lease rates will grow 7.3% by year-end.
Average asking sale prices continued going up, ending the quarter at $202.94 per square foot, up 5.1% year-over-year, despite a slower growth rate during the second half of the year. They’re projected to grow this year, as purchasing opportunities will be limited.
Lack of available supply curbed occupancy gains down the stretch for the year, closing the quarter and the year with negative net absorption due to the shrinking base.
Four buildings were demolished, accounting for over 600,000 square feet in the quarter. Activity by third-party logistics, e-commerce, engineering firms and medical manufacturing companies helped limit occupancy losses for the year. For example, engineering firm Southland Industries made a big splash in West Orange County, expanding into a 200,000-square-foot building in Garden Grove.
The growing need for medical products prompted Applied Medical to buy another manufacturing facility, increasing its footprint in the region. Despite the setback in net absorption, we predict the industrial market will bounce back strong, as net absorption is projected to be positive this year.
—Analysis by CBRE Research
