The Orange County industrial market was tight throughout most of 2014, a sign that the region is in need of a significant amount of new construction and development projects on top of its current 253 million or so square feet.
The lack of available space in the market throughout the year prompted some tenants to look elsewhere and brokers to use off-market properties to find space for clients.
The positive trends included increased demand for user sales, lower vacancy rates than adjacent markets, and dwindling concessions due to the market being constricted.
Activity in buildings of more than 50,000 square feet slowed throughout the year compared to smaller buildings. That was primarily a result of tenants downsizing and using technology and new business models to save money.
The overall market slowed, with move-outs during the fourth quarter turning net absorption negative for the first time in 14 quarters.
The average asking rate at the end of the quarter was 68 cents per square foot, unchanged since the third quarter and up 1 cent since the first quarter. Lease rates have yet to gain traction in the market, hardly changing from quarter to quarter. The manufacturing and warehouse and research and development sectors closed the fourth quarter at 62 cents and 89 cents per square foot, respectively, unchanged from the third quarter. Overall asking lease rates had not begun to increase, but concessions decreased and in turn made leases more expensive with the lack of free rent and tenant improvement allowances.
Average asking sale prices continued to move up, ending the year at $152.35 per square foot, a 9% increase over the $139.36 per square foot in the first quarter due to low interest rates. It has also become apparent that due to low interest rates, users are buying while market conditions are advantageous. The increased sales activity has consequently slowed leasing activity, keeping rates stagnant.
CBRE Econometric Advisors predicts that in the coming quarters, lease rates will follow the same upward trend as sale prices.
The overall vacancy rate in Orange County finished the year at 2.7%, up 12.5% over the third quarter and 6.9% year-over-year. North OC posted the largest change from the third quarter, its vacancy rate increasing from 1.8% to 2.5%, largely due to completions at the Anaheim Concourse Distribution Center and Yokohama Tire vacating a large block of space in Fullerton. That activity alone added 1 million square feet of vacant space back to the market.
The food, home product, and furniture industries led the way in leasing, contributing immensely to the net absorption. Blue Line Food Services Distribution, for example, leased more than 121,000 square feet in Anaheim.
The county’s industrial market delivered 958,241 square feet of new space in 2014, surpassing the 501,780 square feet recorded in 2013.
Preleases and the lack of substantial construction in the pipeline, though, undermined efforts to add adequate supply for tenants. CBRE Econometric Advisors predicts that absorption will continue to outpace completions well into this year, even as several developments are scheduled to be finished.
Analysis provided by CBRE Research
