Friday, August 13, 2010

Orange County Industrial Market Stabilizing!!

Overview:

In what is perhaps the strongest evidence yet that Orange County’s industrial market is stabilizing, the mid-year vacancy rate of industrial space posted its first quarterly decline in three years, falling 0.1% to 6.7%. Accordingly, in the absorption category, a barely positive net gain of only 273,569 sq. ft. qualifies as the biggest in 12 quarters.

The Reasons:

Companies are taking advantage of lease rates at seven-year lows and are trading up in quality. This comports with other Lee & Associates’ data that tracks space in buildings larger than 10,000 sq. ft., in which analysts at the county’s dominant industrial brokerage firm note similar changes in other measurements of vacancy and availability. New leases are on track to pass 18 million sq. ft. this year, which would be the most since 2004. In the second quarter, users secured 4.3 million sq. ft. of space. In three of Orange County’s five markets net absorption was on the plus side and only slightly negative in the Airport (-12,294 sq. ft.) and West (-15,267 sq. ft.) markets. Anxious landlords, however, continued slashing lease rates. Asking rents have fallen 15.8% year over year to anaverage of $.64 cents per sq. ft. triple net, reaching 2003 levels.

On the Ground:

Reports from Lee & Associates industrial specialists in the field shed light on possible reasons for the second quarter halt in the occupancy slide. For example, attractive rents are causing a mini-migration of industrial tenants away from longtime operations in South Bay cities such as Compton, Carson, Torrance and Wilmington. These inbound tenants are coming from older, congested areas of Los Angeles County – with vast inventories of aging industrial product in deteriorating neighborhoods – to higher image buildings of all sizes at near-comparable rents in first-tier Orange County locations. Typically when users relocate they remain in the same market. Lee & Associates brokers have been engineering gross rents in the low to mid 40-cents per-sq.-ft. range. Generally speaking, all five of the county’s industrial markets – North, Central, West, Airport and South, which total about 294 million sq. ft. of space, posted vacancy rates that were either lower or virtually unchanged from the first quarter.

The West market, the county’s smallest with about 24.2 million sq. ft., posted a 5.9% vacancy rate.

The Airport market with approximately 75.5 million sq. ft. of space reported the most vacancy at 7.7%, which was unchanged from the fi rst quarter and is up from 6.5% a year ago.

Vacancies in the North County market – the county’s largest with 85.3 million sq. ft. and which includes Anaheim – fell to 6.1%, a decline from 6.5% in the fi rst quarter.

In the 64.4- million-sq.-ft. Central market, empty space totaled 3.94 million sq. ft. for a 6.1% vacancy rate.

Forecast:

Despite an apparently stabilizing market for industrial space, it would be unrealistic to expect a steadily downward march in vacancy rates.

But because companies are not hiring doesn’t mean they won’t take advantage of low prices and rents to improve operations and facilities.

Source: Costar, Lee and Associates