Industrial Market
The industrial market in Orange County hit pause in
mid-2022. Just like that. A once-robust market filled with constant activity
suddenly fell silent. Buildings that would have generated multiple tours and
competing offers within days began sitting for weeks, then months.
Yes, we’re beginning to see signs of life again.
Several notable manufacturing companies are actively touring and leasing space.
Phones are ringing a bit more frequently. Brokers are cautiously optimistic.
But overall, the velocity remains tepid compared to the frenzied pace we
experienced only a few years ago.
For owners of industrial real estate, that slowdown
carries a significant cost.
Most owners understand the obvious expenses
associated with vacancy. If you own your building free and clear, your carrying
costs may be limited to property taxes, insurance, utilities, landscaping,
security, and maintenance. If there is debt on the property, the monthly burden
rises quickly as mortgage payments continue regardless of whether the building
is occupied.
But the most overlooked expense is often the
largest: opportunity cost.
Every month a building sits vacant is a month of
rent that can never be recovered. Unlike many businesses where lost revenue can
potentially be made up later, industrial real estate doesn’t work that way. A
missed month of occupancy is permanently lost income.
Consider a 25,000-square-foot industrial building
leasing for approximately $1.50 per square foot. One month of vacancy
represents nearly $38,000 in lost gross revenue. Six months? More than $225,000
gone forever — before considering tenant improvements, commissions, free rent,
and carrying costs.
And therein lies the challenge many owners face
today.
Landlords remain anchored to yesterday’s market
while tenants have become increasingly selective and deliberate. The result is
a widening gap between expectation and reality. Owners resist lowering asking
rents or offering concessions because they fear “leaving money on the table.”
Yet in many cases, the larger financial mistake is waiting too long to respond
to market conditions.
Pricing a vacancy correctly at the beginning of a
marketing cycle is almost always less expensive than chasing the market
downward six months later.
I’ve also noticed another emerging trend. Tenants
today are spending far more time evaluating decisions. During the post-pandemic
industrial surge, occupants often toured a building on Monday and submitted an
offer by Friday. Today, the process resembles a chess match rather than a
sprint. Companies are carefully analyzing labor costs, tariffs, supply chains,
interest rates, inventory levels, and broader economic uncertainty before
committing.
That caution impacts landlords directly.
The cost to originate a tenant has risen
dramatically. Leasing commissions, tenant improvement allowances, free rent
periods, legal negotiations, architectural reviews, and extended downtime all
contribute to the equation. In many cases, replacing a tenant today can cost
hundreds of thousands of dollars before the first rent check arrives.
Which is why tenant retention has become more
important than ever.
Sometimes the best deal isn’t pushing aggressively
for every possible rent increase. Sometimes it means working collaboratively
with an existing tenant to preserve occupancy, maintain cash flow, and avoid
the substantial frictional costs associated with vacancy.
A vacant building creates stress. An occupied
building creates options.
The industrial market will eventually regain
stronger momentum. Southern California remains one of the most
supply-constrained and economically dynamic industrial markets in the world.
Manufacturing, logistics, and distribution demand will continue to evolve. But
in the meantime, owners would be wise to carefully calculate not only the
visible cost of vacancy, but also the invisible one.
Because waiting can become very expensive.
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