With a strong start to the year, increased activity by a diverse mix of tenants held market fundamentals steady. But the increase only marginally improved occupancy, many tenants opting to play musical chairs with neighboring tenants instead of expanding.
Such constraints made off-market deals more common because new listings spent little time on the market, leaving fewer available options.
Fierce competition to lease quality space prompted further rental growth. The dynamics of solid activity, rising rents and limited available supply kept the market heavily slanted in landlords’ favor. With no noteworthy changes or market disruptions anticipated, the market should have a strong second half.
Limited supply and steady demand pushed lease rates to 91 cents per square foot, a 2.3% quarter-over-quarter increase.
Year-over-year, rates increased 3.4% due to flat vacancy and availability. High tenant demand afforded many landlords the opportunity to achieve higher rents. We predict lease rates will grow another 3% in the second half of the year due to the unlikelihood of an inventory increase.
Sale prices, like rents, hit a new record high, closing at $216.58 per square foot. Investors’ interest in buying industrial assets in an infill market such as OC’s resulted in a 6.1% increase in year-over-year sale prices.
The softening or flattening of rates in the immediate future remains highly unlikely due to the lack of purchasing prospects for interested buyers.
The lack of vacant space was unchanged, closing at 1.5%. The shortage of buildable land to increase the base remained the key impediment to any movement in vacancy and leasing activity.
Despite vacant and available space filling quickly, Class B product was the space of choice for many users in the absence of Class A, as well-located Class C product garnered a wealth of activity.
Vacancy is projected to stay relatively flat through the year due to quick absorption. Despite a marginal increase in availability, it’s edged slightly above historic lows due to the supply constriction. Availability, like vacancy, is projected to stay on course, barring any major economic event.
Despite limited land opportunities, new construction starts totaled 1.2 million square feet. North OC remained the only submarket with construction activity underway. Other submarkets have minimal available industrial land to develop. In addition, longer development approval processes for proposals over 20,000 square feet stalled activity. Despite the barriers, more projects are scheduled to break ground this year. We predict development activity will increase, as more than 2.6 million square feet is scheduled to be complete over the next two years (see related story on Shea Properties, page 1).
— Analysis provided by CBRE Research
