Orange County 3Q 2024 Industrial Market Report
OVERVIEW
The Orange County industrial market stabilized in Q3. Sale and lease activity was little changed. Average asking lease rates fell slightly, but sales prices inched back up after pulling back in Q2. Transaction count was up. Active requirements remained subdued in Q3, but there appears to be enough new deals in the pipeline to keep a lid on the rise in vacancy. Landlords are still increasing incentives to get their spaces leased up, as it is taking longer to find qualified tenants ready to make commitments. Owner / user sale activity remained light, but supply is also limited, which has kept pricing near the market peak of 2022. The SBA 504 mortgage rate dropped to 5.76% in September, down from its recent peak of 7.13%. As a result, owner / user buyer requirements picked up late in the period.
VACANCY & AVAILABILITY
Orange County’s industrial vacancy rate rose by just 22 basis points to 4.40% in Q3 after a 96-basis-point jump in Q2. Year over year, the vacancy rate is up by over 70% but is still lower than in Los Angeles County and the Inland Empire. The supply of buildings offered for sale remains low, so most of the vacancy and availability is concentrated in buildings offered for lease only, which has increased the time on market, even for high-quality buildings. The recent completion of several new distribution buildings in the Airport Area is the primary cause of the spike in vacancy in the first half of the year. Of note is the fact that the vacancy rate rises as building size increases. Buildings under 10,000 SF have a vacancy rate of just 2.32%, while buildings from 100,000 to 200,000 SF have a vacancy rate of 7.98%.
LEASE RATES & SALES PRICES
Orange County’s industrial average asking lease rate fell $0.05 in Q3 to $1.61. This contributed to a 6.94% year-over-year rent decrease. Landlords held out as long as they could to hold the line on asking rates, opting instead for offering free rent and tenant improvements, which lower effective rents, but are now doing both to get space leased up more quickly. The average asking sales price drifted slightly lower in the first half of the year due to weakened demand occasioned by high mortgage interest rates.
TRANSACTION ACTIVITY
Sale transaction velocity was relatively flat by square footage and up slightly by transaction count in Q3. A total of 889,209 SF of space was sold in the period in 52 transactions, as compared with 888,166 SF of space in 45 transactions in Q2. Owner / user activity has been sluggish since interest rates ramped up in late 2022, but now that they are heading back down again, activity seems to be picking back up. The anticipated market correction didn’t materialize as supply and demand decreased simultaneously, maintaining near-peak prices. Buyers faced premium prices and rates, resulting in debt service exceeding market lease rates. However, with mortgage rates now more favorable, the buy vs. lease equation is rebalancing, potentially revitalizing the owner / user market.
