The second quarter delivered a small victory to the North County industrial market, with a second consecutive quarter of significant absorption of more than 700,000 square feet recorded.
This is a true bright spot and suggests stability after eight consecutive quarters of weak demand, falling lease rates and sale prices, and negative absorption.
Though market challenges remain, overall activity improved in the second quarter due to historically low interest rates for buyers on the sales side.
Activity also looked up on the leasing side, due to landlords’ willingness to offer attractive lease packages to tenants looking to lock in lower occupancy costs. At the same time, demand for industrial space is increasing as orders from local manufacturers are up for the first time since late 2008.
Also helping matters is the fact that capital has finally returned to the market. That, combined with attractive interest rates, is boosting activity among value-driven users, tenants and investors who see the continual decline of lease rates and sale prices as an opportunity to come off the sidelines.
The residual rate of reducing lease rates and sale prices is slowing and the gap between buyer/tenant and seller/landlord expectations is narrowing. However, sellers and landlords still are forced to be extremely competitive in order to make deals, particularly for larger assets where demand remains somewhat weak.
Though the much-speculated-about distressed market has impacted commercial real estate overall (though to a lesser degree than was expected), Orange County industrial buyers used far less leverage for purchases from 2004 to 2007 than was seen in other sectors of the market. As a result, the local industrial sector as a whole has very few “distressed” properties compared to other types of buildings.
Construction
Although new construction has been non-existent for more than two years, North County’s newest Leadership in Energy and Environmental Design-certified industrial development called Canyon Point in Northeast Anaheim is scheduled to be completed in early September.
The three-building project features buildings ranging from 31,744 square feet to 57,593 square feet.
Two of the three buildings were put into escrow early on during construction, which shows a “flight to quality” and a substantial increase in demand for quality buildings in the 30,000 to 60,000 square foot size range.
User buyers are seeing the long-term benefits of nicer construction and are willing to pay a premium for the right building.
From a historical standpoint, North County’s average asking lease rates of 49 cents per square foot, triple net, and average asking sale price of $112 per square foot for manufacturing and warehouse buildings match those seen in late 2004. Overall demand still needs to increase substantially for rates to improve in the near term.
Britton is a first vice president in the Anaheim office of CB Richard Ellis Group Inc.
The Real Estate Watch Chart
Net Absorption, Rates, etc. is provided in a Adobe Reader .pdf print-friendly file.
