VACANCIES HIT NEW LOWS; RENT GROWTH TOPS 16%

Continued strong demand for industrial space pushed the countywide vacancy rate to a record low 2% in the first quarter, and asking rents, which have increased about 7% annually over the last five years, posted record average gains of 5.2% in the first quarter and 16.6% year over year.

Lee & Associates’ quarterly survey of buildings 10,000 SF and up shows 8,251 buildings with 274.2 million SF, a supply that gradually has declined 2% from its 2008 peak.  Two buildings totaling 283,772 SF were completed in Q1, but the added supply was outstripped by Q1’s 483,450 SF of positive net absorption. Although two of the county’s four submarkets posted small negative net absorption totals in the first quarter, there have been more than 1.76 million SF of countywide tenant growth in the last four quarters, the most since 2008.  

A 132,000-SF building in Buena Park that traded hands for $247 per SF was the largest building sold in Q1, and the most paid for industrial space was $594 per SF for a 28,583-SF building in Tustin.

Of the county’s four submarkets, the largest year-over-year jump in lease rates through Q1 averaged 20.7% in the industrial neighborhoods surrounding the Airport. Lease rates in the 73.2-million-SF submarket ended Q1 averaging $1.46 per SF. The 250,506 SF of Q1 tenant expansion sent the vacancy rate around the Airport to a record low 2.2%.

South County had the slowest rent growth in the county in the last four quarters, 13.2%. South County also has the county’s highest vacancy rate, 3.3%, and highest average rents at $1.54 per SF full-service gross.  Three of the county’s 10 largest new leases in the first quarter were for 254,984 SF of flex space in the Irvine Spectrum. Enevate, a battery maker for EVs, leased 126,497 SF at 34 Parker in Irvine, the county’s second largest new lease in Q1.   

The county’s cheapest space, averaging $1.18 per SF, is in the 42.7-million-SF West County submarket, which also posted the most Q1 net absorption, 525,370 SF. There have been 1.17 million SF of tenant growth in five of the last six quarters in West County, whose vacancy rate settled at 2.3%. The county’s largest new lease in Q1 was for 196,620 SF at 7300 Chapman Ave., Garden Grove. Three of Q1’s top 10 new leases totaled 304,040 SF in West County. 

Net absorption in North County was 107,972 SF in the red in Q1, but the vacancy rate remained at the record low 1.3% as the 115.4-million-SF submarket’s inventory of 3212 buildings was reduced by three buildings. Leases on two buildings of 54,571 SF and 49,515 SF were among the 10 largest new leases in Q1. Bain Capital LP paid $30.1 million for Alticor’s 132,000-SF building at 5609 River Way in Buena Park.

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LANDLORDS AWAIT FULL "RETURN TO OFFICE"

DEMAND FOR SPACE INTENSIFIED IN 2021

Demand for industrial space in Orange County, already one of the hottest markets in the country, continued to set records in 2021.

Out of a total inventory of 274.1 million SF surveyed by Lee & Associates, only 5.8 million SF are vacant. 

Year-over-year rent growth averaged a record 16% countywide in 2021. Net absorption in 2021 totaled 1.8 million SF. It was the most tenant growth in six years, during which average rents have increased 83% countywide.

Orange County industrial space has been in short supply for years.  And with a growing number of companies seeking to be in close proximity to the twin ports of Los Angeles and Long Beach, demand has intensified.

Three of the four submarkets posted net growth in 2021, but North County, which accounts for 42% of OC’s industrial base, was 457,642 SF in the red.  

The Airport submarket reported 1.3 million SF of net absorption in 2021. It was the most growth since 1999 in the 72.9-million-SF submarket. Year-over-year rents increased 23%.

There was 598,000 SF of tenant expansion in South County in 2021, the most since 2014, which pushed down the vacancy rate in the 42.5-million-SF submarket to 2.9%. In South County, rents gained 9% in 2021 and are the costliest in Orange County, averaging $1.46 per SF.

Net absorption in North County was negative in the fourth quarter by 183,537 SF, but because the submarket’s inventory fell nearly 1.5 million SF in the last quarter the vacancy rate settled at 1.3%.  

There was 347,753 SF of net absorption in West County in 2021, a turnaround from the contraction of 741,041 SF in 2020. But net absorption in Q4 was negative 96,406 SF.

The biggest lease in the fourth quarter was to Atlas International for 100,922 SF of space at 5555 McFadden Avenue in Huntington Beach. The 10-year-lease has a $1.25 per SF start rate. The rehabbed building has 11 loading docks.

The three largest sales in the fourth quarter were for buildings in North County.  The largest was Oaktree Capital Management’s purchase of a 123,972-SF warehouse building from CapRock Partners at 2009 Raymer Ave., Fullerton, for $32.2 million, or $259.33 per SF.  Rexford Industrial Realty of Los Angeles purchased a 106,000-SF building on East Coronado Street in Anaheim for $28 million or $264.15 per SF. The Blackstone Group acquired a 102,000-SF building at 1500 East Walnut Avenue in Fullerton for $35 million or $348.04 per SF.

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HEALTHY TENANT GROWTH RETURNED IN Q4

After six straight quarterly losses since the lockdown, countywide demand for space returned in the fourth quarter with positive net absorption across all five county submarkets.

There were 610,486 SF of net absorption in Q4. It was the third strongest quarter since 2015. The healthy end to the year reduced the countywide losses for 2021 to 711,560 SF, an improvement from the 1.3-million-SF contraction in 2020. In contrast to the Covid office downturn, Orange County office tenants shed 4.5 million SF from 2007-2009 following the financial meltdown.

One building was completed in the fourth quarter, a 91,032-SF expansion at shoemaker Vans’ Costa Mesa headquarters. Countywide, seven buildings totaling 1,059,385 SF are underway. 

Most tenant growth was in the 22.4-million-SF Central County submarket, which posted 262,055 SF of positive net absorption in Q4 and 269,085 SF for the year. It was the third straight quarter of positive absorption. There are two buildings totaling 206,500 SF under construction.

North County reported net tenant growth of 124,286 SF for 2021. The 14.5-million-SF submarket only had one negative quarter of 4,253 SF in Q2.

South County posted 151,937 SF of fourth-quarter growth but was in the red for the year by 394,281 SF. Four buildings totaling 403,679 SF are under construction.

The Airport submarket, the county’s largest with 43.9 million SF, posted 151,937 SF of growth in Q4. It was the first quarter of growth in the submarket in 18 months and cut the Airport’s losses to negative 677,377 SF for the year. Some 1.2-million SF went back on the market in 2020.  One building totaling 449,206 is underway.

Landlords in West County, the smallest submarket surveyed with 128 buildings totaling 9.6 million SF, perhaps have suffered the least in the pandemic.  The small submarket reported 23,914 SF of tenant growth in Q4 and demand is off less than 143,000 SF since the lockdown.

Average countywide rents are $2.65 per SF, down 3.3% from the $2.74 per SF peak in Q2 2020. Landlords typically are loathe to discount their published rents in periods of stress, opting instead to offer months of free rent or other off-the-book concessions. In the aftermath of the last recession, landlords were forced to cut asking rents 27% from the $2.60 peak reached in 2007. 

Four of the five largest leases in Q4 were for Irvine Company-owned office space. The three largest leases totaled 339,909 SF in buildings in the Irvine Spectrum. Lincoln Property signed a 72,010-SF tenant for its 870,000-SF Flight at Tustin Legacy. 

The largest sale of the fourth quarter was Amazon’s $258.82-per-SF cash purchase of a 39-year-old, 637,500-SF office building in Brea from Cerberus. In the Airport submarket, the largest deal was the $64-million purchase of 1301 Dove Street by Ocean West Capital Partners for $297.87 per SF.

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DEMAND IMPROVES BUT DELTA SOWS CAUTION

Office demand resumed in most of the county in the third quarter amid an economy straining to return to pre-pandemic normalcy, but tenants continued to shed blocks of space in the county’s largest market around John Wayne Airport.

Nearly 540,000 SF of Q3 growth was reported in the North, Central and South County markets, which total 64.1 million SF. South County posted 318,539 SF of net absorption, its strongest quarter in more than three years.

But the 43.6-million-SF Airport market, which accounts for 37% of the total county inventory, ended the quarter with an added 433,151 SF in the red. In the last six quarters more than 2 million SF have gone back on the market, pushing up the Airport’s vacancy rate from 11.4% to 16.5%.  In the 9.6-million-SF West County market, there were 108,519 SF of Q3 negative absorption.  

Countywide net absorption in the third quarter was negative 1,873 SF, a dramatic improvement from the 1.1 million SF of negative absorption in the first half and 2.6-million-SF retreat since Q1 last year. 

It was hoped early this year that vaccine distribution would shorten the pandemic and the economy appeared poised for a rapid re-opening. But vaccine resistance plus emergence of the more-infectious Covid-19 Delta variant set off a surge in serious infections.  This renewed concerns about employee health, causing some companies to delay office re-opening plans.

The largest Q3 lease was a direct deal for 90,000 SF on Von Karman Avenue in Irvine by health club operator Life Time. Additionally, the third quarter reported the most lease transactions since the lockdown, but three of the five largest deals were for sublease space, which climbed to an all-time high of 1.4% of total inventory.  By comparison, vacant available sublease space reached 1.2% of total inventory in 2008, the start of the great recession.  Of the 99 largest lease agreements in Q3, 14 were subleases. 

In most economic downturns landlords will offer concessions of free rent and increased tenant improvement allowances before cutting lease rates.  Additionally, building owners sometimes offer bonuses to procuring brokers.  Currently, some landlords are offering brokers up to $4 per SF for delivering new tenants. But building owners also have cut average asking rents nearly 9% for Class A space, which accounts for 42% of total inventory.  Overall, average rents have fallen 3.6%.

The largest building sale of the quarter was Opal Holdings’ $150.5-million purchase of the 435,177-SF City Tower in Orange, which translates to $346 per SF.  That was followed by the sale of the 181,500-SF Taco Bell World Headquarters in the Irvine Spectrum to Skyline Group for $624 per SF.

VACANCY HITS NEW LOW ON RED-HOT DEMAND

Industrial users leased 1.8 million SF of space in the third quarter. It was the most three-month net absorption in 17 years. The strong tenant expansion also drove down the vacancy rate to an all-time low.

The intensified demand reflects national trends. Businesses are reacting to pandemic-fueled e-commerce growth along with disruptions at several points in the global supply chain, affecting everything from raw materials to finished goods.  Locally, a growing armada of as many as 80 cargo ships has been anchored offshore with each awaiting a berth at the port of Los Angeles or Long Beach. 

There was healthy growth in each of the county’s four industrial markets, and Lee & Associates’ industrial specialists report that quality available space of virtually any size is drawing multiple offers.  Anything with a loading dock and 18 feet of clear height will excite user interest. It follows then that the lack of supply has anxious decision makers willing to accept space that leaves some boxes unchecked. 

The last four quarters countywide rents gained 11.6%, the most since 2016-17.

Lee & Associates surveyed 275.5 million SF in 8,257 buildings of at least 10,000 SF. 

North County, the largest market with 42% of county inventory, posted 825,995 SF of net absorption in the third quarter.  It was the second most growth since late 2004. The vacancy rate fell 50 basis points, settling at a record 1.2%. Year-to-date-net growth totaled 1.2 million SF.

There was 543,009 SF of net absorption in the 73-million-SF Airport market in the third quarter with 1.3 million SF of tenant expansion year to date. There has been more than 1.5 million SF in positive absorption over seven of the last eight quarters.

The vacancy rates in South County and West County each fell 50 basis points in the third quarter to 3.4% and 2.7% respectively.

In the 42.5-million-SF South County market there was 223,632 SF of tenant growth, which has been positive in three of the last four quarters and totaled 598,101 SF.   

In West County, which also includes 42.5 million SF of space, net growth in Q3 totaled 212,380 SF, the most since late 2018. Tenant growth has been in the black for four straight quarters, totaling 642,000 SF.

The largest lease in the quarter was for a 246,622-SF building on West Warner Avenue in Santa Ana by Cloud Mountain at 88 cents per SF for five years.

Investors paid $83.6 million, or $252 per SF for a 331,376-SF distribution building on Plaza Drive in Cypress.

MARKET IMPROVES ON VACCINES, ECONOMIC NEWS

With encouraging economic news and an effective vaccination campaign that dramatically reduced infections, the office market showed hints of stabilization as companies hold to their plans for post-Covid office re-openings in the third quarter.

Second-quarter net absorption was negative 169,466 SF, a significant improvement from the negative 2.3-million-SF total of the previous three quarters. But for the new space included in the 117.4-million-SF inventory in Q2, net growth would be in the black. Four buildings totaling 218,513 SF were delivered in Q2 and five buildings totaling 829,738 SF remained under construction.

So far in the pandemic, vacancies have increased about 3.5 million SF, which includes 693,020 SF in nine new buildings.  This has combined to push up the vacancy rate from 10.6% in Q1 last year to 13.6% at the end of the first half. Vacancies are the highest since Q2 2012, amid the recovery from the financial crisis and recession when vacancy peaked at 17.8% in 2010.  

For another historical comparison, from 2007 through 2009 empty space increased about 6 million SF. That included 3 million SF in 27 buildings delivered during the period.  Much of the oversupply of space was leased up with 4.6 million SF of absorption by 2012.

Asking rents since early last year have declined an average of 3.6% to 2018 levels.  Landlords, as is typically the practice during times of stress, are offering free rent and other concessions rather than reduce the lease rate. 

Second-quarter net absorption was in the red in Orange County’s five geographic zones.

Landlords have suffered the least in the 14.5-million-SF North County market, whose vacancy rate is 6.8%, up only 40 basis points since Q1 of last year. There was 4,253 SF of negative net absorption in Q2 but demand year to date is 78,942 SF.

West County, the smallest market with 9.6 million SF of inventory, posted 24,382 SF of negative net absorption in Q2 but is 36,332 SF in the black in the first half.  The vacancy rate has climbed from 8.4% to 11.3% since Covid.

Central County’s 22.5 million SF of inventory has seen 113,567 SF of contraction in the first half but only 2,000 SF of negative absorption in Q2.

Tenants in the 43.7-million-SF Airport market shed 125,307 SF of space in Q2 for a total of 416,263 SF of negative absorption in the first half. Three buildings totaling 580,238 are under construction. 

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