Orange County’s industrial market hit the preverbal low point of the year with a handful of small but influential tenant vacancies negatively impacting occupancy gains. But they were softened by several other large deals, helping to keep activity on par with the previous quarter.
The markets remained in the landlord’s favor, considering constant demand and a static base. Despite the lull, OC should quickly rebound by year-end due to its attractiveness to industrial users.
The slide in occupancy gains resulted in lease rates ending the quarter at 87 cents per square foot, a 1-cent drop. Year-over-year, however, rates increased 3.6% due to steady demand and tenants outbidding each other to secure leases. The sense among many professionals and landlords is that rents may have peaked. As a result, landlords are looking to buy out weaker tenants with leases longer than three years to lock in stronger rates. Some options have included allowing bought-out tenants one year to vacate, using the time to market the property in hopes of bringing in a new tenant at a higher rent in 12 months. Sale prices, unlike rents, reached new heights, closing the quarter at $206.24 per square foot, up 3.4% over the first quarter. Year-over-year sale prices rose 6.9%, each deal surpassing the last.
Unlike the first half of the year, vacancy and availability increased. The vacancy rate closed at 1.4%, up from the 1.2% recorded in the second quarter and unchanged year-over-year. Several large industrial spaces were vacated, including a shocker, Royalty Carpet Mills, which closed at the end of June, vacating over 400,000 square feet. Besides other small move-outs, newly completed product in North OC added available space to the market. The availability rate closed at 3.8%, up from 3.2%. Despite an increase, availability remained below 4% for seven consecutive quarters, but with development picking up, availability should rise above 4% by year-end.
Despite negative net absorption, gross activity outperformed the previous quarter, bringing the total to 7.8 million square feet year to date. North OC accounted for 58% of the gross activity. There was no dominant industry that led the way; however, renewals picked up from companies occupying under 100,000 square feet. Shrinking available supply and the need to remain in the OC region prompted the wave of renewals. Larger transactions were dominated by e-commerce and 3PL companies eager to solidify their last-mile presence in the market. Key transactions included Amazon over 235,000 square feet in Buena Park, while Shaw Industries, the world’s largest carpet manufacturer, leased 230,000 square feet in Cypress.
Occupancy gains will likely increase due to a pool of tenants eager to occupy increased available space.
Development activity gained needed momentum as several projects broke ground, the majority in North OC. The lack of construction had been an issue in the region for the past year, but during the quarter development reached 1.1 million square feet. Activity at the new developments remained high, with Rosendin Electric preleasing 170,000 square feet in Anaheim. The remaining 970,000 square feet in Fullerton should draw additional interest from users once more details about divisibility become clear as completion nears. There are several projects in the pipeline, but most won’t commence until next year.
Analysis provided by CBRE Research
