Tuesday, January 25, 2011

Orange County Industrial Best Since 2007



I provide location advice to owners and occupants of industrial buildings in Southern California. My friend and colleague Art Barrett of Art Barrett and Associatates penned this recap of the Orange County, California industrial market. Art's recap has the market stabilizing at 6.5% vacancy. Many in our industry have felt the surge in activity since the doldrums of 2008 and 2009. You can read the entire recap below.

Overview:


After a steady three-year decline, the Orange County, California industrial market appears finally to have stabilized. The fourth quarter closed out 2010 showing healthy net absorption – the third straight quarter with absorption in the plus column.

The last year with three quarters of positive absorption was 2006. The Q4 reduction of 428,916 sq. ft. of available space was the most since Q2 2007.

The year-end vacancy rate settled at 6.5%, down 0.1% from its Q2 peak and less than its 7.6% 10-year high in 2002. Total available space finished the year at 10.5%, a full percentage point less than Q1 which was the last of 13 straight quarters of increasing availability. During that time, 8.5 million sq. ft. of industrial users scaled back or shuttered their businesses.

In early 2010, improvement in the industrial market still seemed far on the horizon. But following a dismal Q1 in which tenants vacated more than 1 million sq. ft., absorption turned positive in Q2. After Lee & Associates’ previous Q3 report on buildings larger than 10,000 sq. ft. went to press, the data was adjusted. The reconciled totals showed 220,669 sq. ft. of positive absorption in Q3. The trend gained strength in Q4.

All told, the 18 million sq. ft. leased in 2010 was the most since 2004.

The year-end data is more evidence that confidence in the economy is returning. Unemployment has leveled off and economists at Chapman University and Cal State Fullerton forecast modest Orange County job growth in 2011.

Storm clouds on the horizon:


Lee & Associates industrial specialists, however, believe perhaps a record volume of so-called “blend and extend” leases of existing tenants since 2008 may dampen absorption particularly of large buildings for the next few years until the extended leases run their terms. Small users who signed early renewals in multi-tenant buildings, however, have greater flexibility with a landlord to expand within their project.

However, despite the seeming high rate of vacancies many available small and mid-size buildings are obsolete and poorly located, limiting choices for ideal facilities.

Four of the county’s five industrial markets improved in 2010:



--The Airport market, with 25% of Orange County’s 294-million sq.-ft. industrial base, was the top performer in Q4 with 397,214 sq. ft. coming out of available inventory. Its vacancy rate fell 0.5% to 7.3%.

--Absorption in North County – the largest market with about 85 million sq. ft. – was down for the year but only slightly and closed with a 6.1% vacancy rate.

--Central County finished the year with absorption in the black for the year, posting three straight quarters of absorption gains and ending 2010 with vacancy at 5.8% or 3.8 million sq. ft.

--West County’s 24.4 million sq. ft. of space was 4.9% vacant, a 0.9% improvement over 2009.

--Still struggling is the South County with 44.8 million sq. ft. and vacancy at 8% -- up 0.4% for the year.

Market Forecast:


Even though lease rates haven’t quite leveled off – with asking rents plunging 29% since March 2008 and 12% last year – the deals of 2009 for quality space are gone. The market for available buildings for sale also is expected to tighten.