Friday, November 21, 2014

Orange County #CRE, 8 Things You MUST Know

Image Attribution: www.getdigsy.com
Orange County, California Industrial has seen a resurgence like none since the early part of the decade of the two thousands! Currently, 97 of every 100 industrial buildings are occupied in Orange County. This is the LOWEST vacancy factor that I can recall since vacancy factors were first computed back in the mid eighties. If you doubt for a moment that the above is true, ask any occupant broker about the imbalance that exists, and you will get an earful! Orange County, California is deeply entrenched in an owner's market. So much has changed since the post recession occupant market evaporated in 2013 that I thought a recap of the current trends was in order.

Vacancy: As mentioned above, vacancy for industrial space is at a fifty year low. Underwriting a new loan or investment deal requires a deduct of 5% for vacancy...but the percentage is no longer justified! You now get penalized as an owner for a vacancy that is not supported in the market.

Sales Prices: Sales prices for occupant owned industrial buildings have hopped 50% since the beginning of 2013...50%! That is staggering. Our industrial values have now eclipsed 2007/08 levels before the world came to an end in the fourth quarter of 2008. The reasons are a simple case study in Econ 101...supply and demand. We have too little supply to meet the demand.

Lease Rates: Lease rates are starting to move up as well, albeit not to the degree of sales price increases. Fueling the rental rate increases are companies searching for expansion space to buy. When a suitable alternative cannot be found, these companies resort to leasing. Additionally, because of the low vacancy, many expanding companies are forced to renew leases at their present locations and figure out a way to band aid for their growth by adding offices, creative material handling, or outsourcing a function. Renewals of existing leases have caused the available inventory to shrink.

Capitalization Rates: Orange County industrial cap rates are hovering around 5%. Credit of the tenant, size of the building, price per square foot, length of the lease, lease rate compared to market can all affect capitalization rates positively or negatively, BUT a five year lease at a market lease rate for a 50,000 sf building with local credit should trade for a 5-5.5% cap.

Mergers and Acquisitions: We have witnessed a tremendous amount of merger and acquisition activity in the past two years in Orange County. Comparable to the activity we have experienced in the industrial investment sale arena, capital is plentiful and seeking returns.

New Construction: Several new industrial projects have dotted the Orange County landscape. Western Realco and Panattoni Development have been the most active with four new projects in Brea and Anaheim between them. Western Realco has developed excess land acquired from Harte Hanks and Suzuki. Panattoni is reshaping the former Boeing Campus with new state of the art freestanding buildings. All of the new developments are achieving tremendous activity at record prices with three of the four projects sold out prior to completion.

Interest Rates: Eisenhower era interest rates, that your grandparents would envy, continue to drive owner occupant purchase activity. Even with all time high purchase prices, an occupant can invest 10% of the purchase price and achieve a debt service comparable (or slightly higher) to a market lease rate. I've been predicting a rate hike for two years. It hasn't materialized. That's why I stopped playing blackjack.

The Next 12 Months: Continued lease rate growth, a leveling of sales prices, a small rise in interest rates...unless something catastrophic occurs...in which case, your call...