Vacancy Decreased In Second Quarter 2018

The Orange County industrial market closed the second quarter with net absorption recording 176,100 square feet. Much of this positive movement stemmed from tenant move-in's in the Airport Area submarket. There is strong demand for new industrial buildings as developers are challenged with finding available development opportunities. Industrial product is expected to continue deplete 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 prior to expected increases of interest rates. 

The total vacancy rate in the second quarter decreased 10 basis points from last quarter to 2.2%. Space remains scarce in Orange County, with the availability rate at 3.4%, down from 4.1% one quarter ago. Vacancy is tightest for buildings up to 9,999 square feet at 1.4%, while buildings 100,000 square feet or greater have the highest vacancy rate at 2.6%. The Orange County industrial m arket recorded positive net absorption of 176,100 square feet. Much of this absorption stemmed from the Aiport Area submarket. The biggest leases of the quarter was Lexor, Inc signing 187,700 square feet deal in Westminster, Robinson Pharma signing 100,233 square feet in Costa Mesa and Dynamex signing 97,340 square feet in Fullerton. 

The weighted average asking rental rate for Orange County recorded at $0.89 PSF NNN, up 6.0% from the $0.84 reported one year ago. Rents have steadily risen over the past three years as industrial tenant supply options remain limited. Average asking rates were highest in the South County submarket at $1.05 PSF NNN and lowest in the West County submarket at $0.79 PSF NNN. During the second quarter, no new buildings delivered to the market. Two industrial parks are currently under construction totaling approximately 1.2 million square feet. The Beckman Business Center project, which consist of 7 buildings is expected to be completed by the second half of 2018. 

Investment volume for industrial properties in 2018 increased by 20.5% compared to the same time last year. Sales volume recorded at $346.8 billion compared to $143.3 billion one year ago. Investment sales prices have increased by 13.8% compared to this time last year, currently averaging $197 PSF. 

Key Takeaways:

  • The vacancy rate decreased to a historical low by 10 basis points to 2.2% during the second quarter. Vacancy stood at 2.5% one year ago. 
  • Asking rental rates increased 6% from one year ago to $0.89 per square foot (PSF) triple-net (NNN). 
  • Industrial demand recorded 176,100 square feet of net absorption. Much of this positive demand was in the Airport Area submarket.
  • Construction activity increased during the second quarter totaling approximately 1.2 million 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 1.2 million 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.