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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CURRENT SWOON PALES AGAINST LAST RECESSION

Tenants shed 1.14 million SF of office space in the fourth quarter. It was the third straight quarter of negative net absorption and increased the year’s retreat to 1.7 million SF. 

By comparison, however, 2020’s contraction was far less severe than the punishing effects of the last recession. The financial crisis produced 2.8 million SF of negative absorption in 2009 and negative 4.9 million SF over 12 quarters ending in Q3 2010.  

Additionally, the current recession looks to be mercifully cut short by vaccine deliveries and increased probability of more federal economic stimulus. Many companies have begun planning to reopen offices by the third quarter. Other office users are evaluating how much remote working will blend into their operational culture.  Schools everywhere are planning to reopen in the fall.

There is consensus among national analysts, including from the Urban Land Institute, that in some ways the pandemic is an accelerant, adding fuel to existing trends dramatically affecting commercial property.  Skyrocketing online sales during the lockdown, for example, have intensified already-strong demand for last-mile distribution facilities.

Among the latest office trends involves more short-term, flexible co-working space. Although it still accounts for a small share of overall office use, flexible, shared space is being viewed more approvingly by companies assessing their long-term plans. Also, banks are reducing their footprints as customers have become more comfortable with mobile banking.

It’s no surprise that the majority of the space in the red was in the 43.7-million-SF Airport submarket at year end. With most of the county’s premium office buildings, the Airport submarket is the county’s largest with a 37% share of the inventory. The North, West and Central County submarkets total 46.7 million SF and combined for negative 410,156 SF.  The 26.5-million-SF South County submarket gained 8,737 SF for the year, posting a vacancy rate of 12%.

In another comparison with the last recession, the 1.3 million SF of Airport space that went back on the market in 2020 was 27% less than in 2009. The year-end vacancy rate was 14.9% in the Airport submarket.  

The vacancy rate in the 22.3-million-SF Central County submarket settled at 13.2%, and negative absorption for the year totaled 166,816 SF.

At the end of 2020, 2,180,156 SF were listed as available for sublease, up from 514,611 SF at the end of the first quarter. 

Sublet space available countywide at the end of 2020 totaled 3,282,533 SF, about 16% of available space. That was a 789,514- SF increase of second-hand space since Q1. Much of the sublease total consists of large blocks of space closed by corporate mandate that will be removed from the grey market inventory as employee inoculations mount.  At its peak in the last recession sublet space also totaled 16% of available space, falling to 8% by late 2010.

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TENANT DEMAND SHRUGS OFF RECESSION

The 24,600 square foot industrial building located at 625 S. Fee Ana Street, Placentia sold for $5,227,500.  The Buyer, PKR Investments, was represented by James deRegt and Jonathan Mejia of Lee & Associates – Newport Beach. The Seller, Temporary Power Solutions, was represented by Keith Greer of CBRE.

After completing significant renovations, the Buyer intends to occupy the property and will operate as P5 Graphics.  The sale was completed with Seller financing and was in escrow for 60 days.

The Buyer intends to occupy roughly one-third of the building and retain tenants in the remaining space.  The property was placed on the market in August 2020, was in escrow within 3 weeks, and closed escrow in a total of fewer than 60 days.

COVID HITS THE AIRPORT MARKET

Companies in the Airport market shed a near-record volume of space in the third quarter, forcing the countywide office vacancy rate up 73 basis points to 11.6%, as the economic shock of the Covid pandemic rippled through the county.

The Airport market, which has 37% of the county’s 117- million-SF inventory, was 724,151 SF in the red in the third quarter, the most negative absorption since Q4 2007.  It drove up the countywide negative absorption total to 790,568 SF for the quarter and negative 657,817 SF year to date. Countywide, net absorption gains averaged 670,696 SF annually over the previous three years.

Overall rent growth was weak prior to Covid, gaining 3% since 2017, and year-over-year growth was nil.  Nevertheless, despite continued uncertainty and sharply reduced leasing activity, Lee & Associates office specialists are not yet seeing Covid discounts amid questions on whether and how much eviction moratoriums are propping up the market.

Only two of the county’s five markets reported Q3 growth.

There was 45,374 SF of net absorption in South County, whose year-to-date total of 262,657 SF is the most in the county.  There was 1,317 SF of net growth reported in North County, which has 14.6 million SF of office space and a 6.2% vacancy rate, the county’s lowest.

With 101,968 SF of negative absorption in Q3, the 22-million-SF Central County market has contracted in nine of the last 11 quarters, putting 474,820 SF back on the market. Nevertheless, there was 5.2% year-over-year rent growth.

Negative Q3 absorption totaled 11,139 SF in the small 9.6-million-SF West County market.  Tenants in West County buildings have expanded 56,811 SF this year.  Despite its 6.9% vacancy rate, average rent growth has been virtually flat the last two years.

The five largest blocks of space to come back on the market at the Airport in the third quarter totaled more than 260,000 SF and ranged from 22,000 SF to 75,000SF.  There has been virtually no growth in average rents since 2017 in the Airport market, and the Q3 total of sublet space available, 357,356 SF, is the most since 2006.  

The county’s biggest lease of the year was signed in August.  Panasonic Avionics leased 260,000 SF for 1,600 headquarters employees at Park Place at Michelson Drive and Jamboree Road in Irvine.  The company – which makes in-flight passenger video and communications gear – is moving from about 300,000 SF across several low-rise buildings in Lake Forest into as many as five of Park Place’s 13 buildings.

The largest sale of the quarter was the $54.8-million purchase of the 10-story 4 Hutton Centre by LaSalle Investment Management. The 10-story building traded for $252.57 per SF.  The building last sold in 2011 for $37 million.

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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.

Coronavirus Hobbles Strong Market

VIRUS THREATENS OFFICE GROWTH

Demand Eases, Rent Growth Slows

HEALTHY DEMAND GREETS NEW BUILDINGS

Lease Rates Level Off, Deal Volume Falls

APPETITE FOR CLASS B SPACE FUELS 2019 ABSORPTION

STRONG FIRST-HALF DEMAND; AIRPORT MARKET LEADS TENANT GROWTH