Orange County 1Q 2023 Industrial Market Report
Overview
The recent trend in the Orange County industrial market continued in Q1. Despite historical lows, vacancy rates rose slightly while both gross and net absorption declined. Conversely, average asking lease rates experienced another moderate increase. Average asking
sales prices remained relatively stable. For the third consecutive period, new sale and lease transaction activity saw a downturn. Construction levels, consistently low in recent years, remained unchanged. Active requirements continued to diminish, signaling a further market slowdown due to increased capital costs, ongoing inflation and anticipated sluggishness in the general economy. With mortgage interest rates doubling in the past year and now hovering around 6%, Orange County is heading into the wind, as industrial activity has traditionally relied on owner / user sales. The increase in vacancy rates reflects the extended time-on-market for
lease offerings. While deals are still being finalized, the process has become more protracted, as tenants are exercising more caution before committing to long-term leases.
Vacancy/Availability
The Q1 vacancy rate in Orange County rose by 38 basis points to 1.46%, a year-over-year increase of 18 basis points. High-quality spaces remain scarce, but time on market is growing as tenant urgency decreases due to reduced competition. Landlords, especially those in the institutional ranks, are prioritizing strong credit tenants and becoming more flexible with concessions like free rent to get them. The availability rate, which also includes occupied spaces listed for lease or sale, increased by 67 basis points to 3.11%, marking the fourth consecutive quarterly rise. However, availability is primarily concentrated in lease offerings,
as prospective sellers hesitate to list properties with pricing below the 2022 market peak. The shift in dynamics reflects the market’s adaptation to changing economic conditions.
Lease Rates & Availability
The average asking lease rate for the county increased by $0.04 to $1.62, following a $0.08 rise in Q4. The Airport Area saw the most significant growth, with a $0.13 increase to $1.68. The West County submarket also experienced a $0.08 increase, ending the period at $1.59. In contrast, North County saw a slight decrease of $0.02 to $1.51. Despite a recent decline in overall demand and an increase in time on market for lease spaces, year-over-year asking rents have grown by 29.6%. The average asking sales price marginally decreased by $1.75 to $390.12 per square foot after a substantial drop in Q4. Rising mortgage interest rates have put pressure on sales prices and reduced demand from owner / users, a crucial driver of Orange County’s industrial market. Reluctance to list properties below recent peaks has constrained for-sale inventory, with the majority of available spaces offered for lease only.
The county’s average asking sales price broke the $300 PSF barrier for the first time in Q3, and then took a big leap of $23 PSF in Q4 to a record high of $323.14. Moreover, some smaller buildings with good amenities and location are trading in the $400 PSF range. Off-market deals are becoming more common as buyers are making aggressive unsolicited offers in the hope of securing a new building without having to face the intense competition associated with listed properties. Last quarter we characterized the sale market as being on fire and that is still the case.
Transaction Activity
Lease and sale activity remains constrained by a chronic
shortage of high-quality space. However, with decreased competition, active tenants and buyers have more options, especially for lease product. Focusing on smaller-sized properties, Q1 lease transactions increased to 173, while total leased square footage dropped to 1.33 million. Sale transactions fell from 75 in Q4 to 40 in Q1, with 661,838 SF sold for an average of 16,525 SF per sale. Total square footage leased and sold declined to just under 2 MSF in Q1, reflecting the trend we see in most major Southern California markets.
