Demand Gets Second Wind in Third Quarter; Lease Rates, Prices Surge
After
easing in the first half of the year, overall demand resumed in the third
quarter for Orange County industrial space, keeping vacancy rates in record low
territory while fueling the surge in lease rates as the long economic recovery
continues.
Net
absorption countywide totaled 190,167 sq. ft., in the quarterly Lee & Associates
survey, and the vacancy rate settled at 2.7% on a base inventory of 278 million
sq. ft. in 8,316 buildings. It is estimated, however, that as much as half of
the space currently available is functionally obsolete. Direct full-service
asking rents climbed to an average of 99 cents per sq. ft., an unprecedented
jump of nearly 30% in the last three years.
The
steady recovery of Orange County’s industrial market is in its seventh year and
soaring building prices have exceeded pre-recession highs, giving rise to
speculation about timing the inevitable end to the current cycle. But for now,
the market clearly is driven by users whose growth requires larger facilities.
Those expansion plans have been confounded as few quality spaces or buildings
of any size are available for lease, every quality building for sale draws
multiple offers and there is virtually no land for development.
In
addition to the strong national economy, a number of regional factors support
the intense demand for space, including proximity to the ports of Los Angeles
and Long Beach, for example. Prior concerns of disruptions to the giant twin
ports from last year’s expansion of the Panama Canal and negative effects from
threatened changes to international trade deals have not materialized. In fact,
high levels of container traffic are flowing through the ports, which posted
record volume in August.
The
North County submarket, the county’s largest with 117 million sq. ft., posted
185,221 sq. ft. of Q3 net absorption and the vacancy rate fell to 2.1%. Nearly
1.3 million sq. ft. of space has come off the market in North County in the
last 12 quarters as lease rates have soared 37%.
The
vacancy rate in South County fell to 2.5% in Q3 on 77,364 sq. ft. of net
absorption. Gross asking rents for space marketed direct totaled $1.20 per sq.
ft., a 25% increase since 2015.
Net
absorption in the 74-million-sq.-ft. Airport submarket totaled 50,332 sq. ft.,
its vacancy rate closed at 3.8%. In the past 12 months 515,267 sq. ft. of
industrial space has been razed and no new buildings are underway.
After
posting 122,650 sq. ft. of negative net absorption in Q3, West County’s vacancy
rate ticked up to 2.8%, but average gross asking rents have jumped 14% in year
over year.
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