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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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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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.

Q2 DEMAND IS STRONGEST IN SIX YEARS

Encouraged by effective vaccine distribution and improved economic data, companies in the second quarter leased the most industrial space in a three-month period in Orange County since 2015.

Net absorption totaled more than 1.1 million SF in Q2 and more than 2 million SF since the third quarter of last year.  It’s been 23 quarters since growth topped 1 million SF.  In the last three quarters the vacancy rate has fallen 70 basis points to 3%. This is despite a long-term supply shortage that appears likely to become permanent. 

There are fewer than 250 vacant buildings available, and the current 475.5 million SF of inventory has declined 1.3% over the last 10 years as buildings give way largely to apartment development.  But there are occasional developments of headquarters-distribution buildings in random infill locations.  For example, a 1.5-million-SF, four-building spec project broke ground in Q2 on the old Kimberly-Clark site in Fullerton.

Countywide, rents in the second quarter grew an average of 9% year over year.

Tenant demand in Q2 was strongest in the 117.1-million-SF North County market, the county’s largest. Users leased 812,556 SF of space, the largest quarterly total since the first quarter of last year and second most since 2004.  The gain reduced the vacancy rate across Anaheim, Brea, La Habra, Fullerton, Buena Park, La Palma, Placentia and Yorba Linda to 1.9% from 2.6% in Q1.  One of the largest North County leases in Q2 was a 10-year deal for 108,125 SF in Brea by IDI Logistics.

Second-quarter net absorption totaled 213,058 SF in the 73.1-millon-SF Airport market.  It was the strongest first half on record with a year-to-date total of 779,820 SF in the market that includes Costa Mesa, Fountain Valley, Irvine, Newport Beach, south Santa Ana and Tustin.  Three buildings totaling 355,771 SF were delivered in the first half.  The vacancy rate settled at 4%.

Tenant expansion in the 42.4-million-SF West County market totaled 110,927 SF in Q1.  It was the third straight quarter of growth totaling 429,554 SF of net absorption in the industrial neighborhoods of Cypress, Huntington Beach, Los Alamitos, Stanton, Seal Beach and Westminster.  The vacancy rate fell from 3.5% to 3.2%.

With 42.6 million SF of total inventory South County – which extends from the Irvine Spectrum south to San Clemente – was the only submarket posting negative net absorption in Q2 as tenants shed 46,471 SF of space. Nevertheless, the largest overall lease of the quarter was a 127,030-SF lease in the Irvine Spectrum by medical device maker Masimo Inc.

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RENTS GAIN ON STRONG TENANT GROWTH

Strong demand for industrial space continued in the first quarter, pushing down the vacancy rate to 3.3% and lifting lease rates to new highs as competition intensified for a short supply of space.  

Net absorption in Q1 totaled 672,317 SF, the second highest quarterly total in five years.  Countywide, tenant growth has totaled more than 1 million SF in the last six months and 1.8 million SF since the second half of 2019, showing confidence among industrial users despite the pandemic.

But with a vacancy rate less than 4% since 2014, companies planning for growth have faced declining options in quality space for sale or lease.  In recent years, buildings for sale frequently attracted multiple offers.   That trend continues today. Similar levels of interest for the first time are showing up in buildings for lease. A 35,000-SF building for lease in Tustin recently drew offers from five different users.

Asking lease rates are up countywide 6.4% year over year and have gained 40% in the last five years.  In North County, the county’s largest market with 116.8 million SF, asking rents are up nearly 12% year over year and 56% since 2016.

Positive first-quarter net absorption was reported in three of the county’s four markets whose inventory combines for 275.5 million SF of space.

The 73.4-million-SF Airport market posted 664,389 SF of Q1 net absorption, led by a 166,722-SF lease in the Shea Business Center in Santa Ana.  It’s the fifth and largest lease completed 500,000-SF project, the Airport market’s largest development in a decade.  Nevertheless, the Airport market has not grown in year-over-year average asking rents.

There were 172,955 SF of Q1 net absorption in 42.5-million-SF South County market.  Tenant growth pushed down the vacancy rate to 3.8%.  Average asking rents gained 5.5% year over year.

In the 42.4-million-SF West County market there were 120,582 SF of net absorption and the vacancy rate settled at 3.5% and asking rents gained an average of 13% year over year.

North County reported 287,799 SF of Q1 contraction.  Nevertheless, its 2.5% vacancy rate is the lowest in the county and asking rents were up nearly 12% from the same period last year.

There are seven buildings totaling 890,518 SF under construction and most are pre-leased.

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TENANT DEMAND SHRUGS OFF RECESSION

DESPITE COVID, LEASING ACTIVITY GAINS

The Covid-19 pandemic eased its grip on the industrial market as third-quarter leasing activity bounced back along with slight improvement in overall absorption. Rental rates in 2020 have increased at a slower rate than any year since 2008. 

Net absorption was 150,642 SF in the red in the third quarter, but that was an improvement from Q2, when tenants shed 359,636 SF and as Orange County and much of the nation were in lockdown.  There were 564 lease transactions in the third quarter, the most in 10 quarters. It was a turnaround from the 388 deals in Q2, the fewest quarterly leases since the 2008-09 recession.

Orange County’s total inventory is 274.9 million SF.  The third quarter’s overall 3.6% vacancy rate is up from the 2.5% record low of late 2016, but the county remains among the nation’s tightest major markets. Fairly priced buildings for sale continue to draw multiple offers.

Because access to the ports of Los Angeles and Long Beach is vital to many industrial users, it’s worth noting that the twin ports – after reporting a 12% reduction in cargo during the first half of the year – posted record-breaking container traffic in July and August.  Port officials attributed the surge to pent up demand for imported consumer goods.

Year-to-date countywide net absorption through September was 347,362 SF, thanks to strong first-quarter tenant demand, while net absorption for the first nine months of last year was negative 1.14 million SF.  Year-over-year rent growth averages 3.7% and has been flat since Q1.

Overall third-quarter demand was down in three of the county’s four markets.  

North County – the largest market with 42% of the county’s industrial inventory across nine cities that include Anaheim, Buena Park, Brea, Fullerton and Placentia – reported 393,480 SF of net absorption in Q3.  

The largest new lease of the quarter in the county was for a 170,692 SF building on East 183rd Street in the North County submarket of La Palma.  Lee & Associates’ surveys show that North County demand is up nearly 1.1 million SF so far this year.

The 43-million-SF West County market posted the biggest loss of Q3 with 288,080 SF of negative net absorption. Tenants shed space for the third straight quarter, bringing the year-to-date total to negative 864,891 SF.

The 42-million-SF South County market reported 197,032 SF of negative absorption in Q3, bringing the negative year-to-date total to 404,450 SF. 

The 73.3-million-SF Airport market ended the quarter with 59,010 SF of space going back on the market. The 4.4% vacancy rate is down 20 basis points on 526,833 SF of positive absorption year to date.

Demand Flags Amid Covid-19 Uncertainty 

Coronavirus Hobbles Strong Market

Demand Eases, Rent Growth Slows

Lease Rates Level Off, Deal Volume Falls

Tenant Demand, Rent Growth Cools

Rents Spike As Easing Demand Continues

Activity Slows As Users Make Do In Tight Market

Rents Up Again, But Absorption Eases As Resistance Creeps Into Market

Low Vacancy, Rents and Prices Hit Record Levels In Built-Out Market 

Tenants Expand Despite Record Low Vacancy; Rents Soar in North County

Tenants Stressed; Resistance Rises Against Bull-Market Price Growth

Demand Gets Second Wind in Third Quarter; Lease Rates, Prices Surge

Net Absorption Steady - Rents Up - Vacancy Declines