Vacancy Decreased In First Quarter 2018

The Orange County industrial market closed the first quarter with net absorption recording 602,600 square feet. Much of this positive movement stemmed from large tenant move-in’s in the North County submarket. There is strong demand for new industrial buildings as developers are challenged with finding available development opportunities. Industrial product is expected to continue depleting as many properties are being sold as multifamily redevelopment land or creative office space conversion. As demand remains positive and available space options are limited, tenant renewals are increasing. Investors will also continue to take advantage of acquisition opportunities through 2018.

The total vacancy rate in the first quarter decreased 50 basis points from last quarter to 2.1%. Space remains scarce in Orange County, with the availability rate hovering at 4.1%. Vacancy is tightest for buildings up to 9,999 square feet and those between 40,000 and 69,999 square feet at 1.4%, while buildings 100,000 square feet or greater have the highest vacancy rate at 4.3%.The Orange County industrial market recorded positive net absorption of 602,600 square feet. Much of this absorption stemmed from the North County submarket with notable move-in's Rosendin Electric Inc. and Whynter LLC and Smartex. The biggest leases of the quarter was Ricoh Development renewing 500,600 square feet in Tustin, Disney signing 200,000 square feet in Anaheim and Shinoda Designs renewing 183,600 square feet in Santa Ana. The weighted average asking rental rate for Orange County recorded at $0.87 PSF NNN, up 8.8% from the $0.80 reported one year ago. During the first quarter, one building in North County totaling 170,000 square feet delivered to the market at 1730 S. Anaheim Way in Anaheim. The project is expected to be completed by the first half of 2018. Investment volume for industrial properties in 2018 decreased by 110% compared to the same time last year. Sales volume recorded at $210.2 billion compared to $441.3 billion one year ago.

Key Takeaways:

  • The vacancy rate decreased by 50 basis points to 2.1% during the first quarter to a historical low. Vacancy stood at 2.6% one year ago.

  • Asking rental rates increased 8.7% from one year ago to $0.87 per square foot (PSF) triple-net (NNN).

  • Industrial demand recorded 602,600 square feet of net absorption. Much of this positive demand was in the North County submarket.

  • Construction activity fell during the first quarter totaling 934,800 square feet.

  • Demand was positive for the quarter as market conditions remain tight and quality industrial space is scarce. Asking rental rates are expected to rise an additional 3-6% by the end of 2018.

Outlook:

While absorption records positive, the Orange County industrial market continues to move forward with positive momentum. With minimal increase in available supply, asking rental rates have climbed above 2008 peak values of $0.78- $0.80 PSF NNN. Despite positive market fundamentals, tenants are struggling to find future space options to meet their needs given the lack of available inventory.

With 934,800 square feet of space under construction and strong industrial demand, vacancy rates are expected to remain at historic lows. Net absorption is expected to show positive movement in North County due to the future delivery of the Beckman Business Center Development in Fullerton. Asking rental rates are expected to trend upward by 3-6% by the end of 2018. Development is a challenge in Orange County as many industrial properties and development sites are converted to residential and other commercial uses. Real estate is proving to be a desirable asset as investors continue to look for stable income-producing assets and hedge against perceived upcoming inflation.