New Construction Abounds. Where Are The Tenants?

The last big - prior to now - industrial building boom in Orange County occurred pre financial meltdown - circa 2003-2006. During that time frame, several sleek new industrial projects dotted the geography of Anaheim south to Irvine Spectrum. Aging manufacturing campuses gave way to class A developments. Noteworthy among these during the period were the Johnson Control Campus in Fullerton, Mission Land acreage in Brea, Fender buildings in Fullerton, and some of the Boeing holdings in northeast Anaheim. Also interesting were the sizes constructed. Typical were boxes between 10,000 and 50,000 square feet. The land pricing, city influence, capital appetites, construction costs, and market demand all coalesced to create some beautiful new inventory. Our local economy was bustling and owner occupied financing was readily available. Many of the project’s buildings were gobbled up pre-completion. Housed were locally owned manufacturers and logistics providers who took advantage of owning the premises from which they operated. Generational wealth was created as these addresses have continued to appreciate while no new similar sized stock has been developed. 
 
Flash forward to the next wave which began in 2014 and continues today. The Beckman cluster of buildings in Fullerton gave way to a group of large logistics hubs totaling almost 1,000,000 square feet. National Oilwell Varco shuttered plants in Brea and Orange. Brea now boasts a 108,000 square foot address while demolition on Orange started this month. Planned are two new addresses - one is 100,000 square feet and the other 189,000 square feet. Excess land owned by Suzuki in Brea formed the basis of three class A structures. The former Kimberly Clark manufacturing location in Fullerton was scraped and replaced by four buildings equaling over 1,600,000 square feet. Tenants such as Bandai, Samsung, and Sprouts now call the addresses home. And there are several more in Anaheim, Fullerton, Brea, Irvine, and Garden Grove. Interestingly, despite the significant investment and construction efforts, there seems to be a glaring absence of tenants ready to occupy these remaining newly built spaces.
 
To understand the conundrum of vacant properties, we must examine the current market dynamics. The economic and market conditions that fueled the previous industrial boom differ from those we encounter today. Fluctuating land pricing, changing city policies, varying capital availability, rising construction costs, and shifting market demands all contribute to the complex equation. During this boom, pronounced was delivery of inventory in excess of 90,000 square feet. Unlike the Inland Empire - where 100,000 square foot buildings are considered small - locally, our sweet spot is well below this mark. One notable shift between the previous and the current wave of construction lies in the ownership models. In the past, owner-occupied financing was readily available, enabling local manufacturers and logistics providers to secure their own spaces. However, this time around, we witness a different landscape with a diverse range of investors and owners driving the construction projects. The motivations and investment strategies of these new players align with the needs of large potential tenants - which are awaiting some certainty before moving - further exacerbating the vacancy issue.
 
There seems to be a glut of available stock between 90,000 and 150,000. Two in Brea, one in Fullerton, one in Garden Grove, two in Anaheim, and four south of the garden grove freeway in Irvine. The sizes above 150,000 and short of 200,000 finds three alternatives in Anaheim and Irvine. Combined there are thirteen units that need occupants five are completed and open for business and the other eight will deliver this year. Generally all are for lease only - which eliminates occupants in this size who want to own. Asking rates exceed $2.00 NNN. Class A buildings leased for less than a buck in the mid 2000’s. 
 
So what does all of this mean? In this author’s opinion we have a demand problem coupled with an inventory surplus. Generally, that imbalance is solved through an increase in demand by price reductions. No one has moved in this direction but someone will soon which resets the market comps to a new level. While the reasons behind the absence of tenants are multifaceted, understanding the current market dynamics, exploring ownership models, and analyzing the evolving demands of businesses are key to unraveling this puzzle. By embracing innovative solutions and long-term thinking, Orange County can unlock the potential of these idle spaces, ensuring a vibrant and prosperous future for the region's industrial landscape.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.