Q3 2017 OC Industrial Market Report

October 20, 2017

The vacancy rate for industrial buildings fell to 2.34%, down from an already low 2.38% in the third quarter. Expect vacancy rates to stay low as the limited and shrinking inventory of quality buildings is quickly absorbed by a motivated pool of tenants. "Availability" will be a significant hurdle for tenants for the balance of 2017 and into 2018. For tenants and buyers, being prepared, being able to react and being willing to pursue "off market" deals will be keys for success in this competitive landscape. Market conditions will also provide landlords with the ability to push rents and potentially upgrade the credit of their tenants.

Net Absorption
Despite fewer "puzzle pieces" to move around in this tight market, net absorption remained healthy in the third quarter 2017 with a positive 92,714 square feet county wide. The Airport Area experienced the biggest swing this quarter with a 3.87% vacancy rate and a negative 533,000 square feet of absorption. This increase in available space is largely due to the Royalty Carpets spaces coming online, adding 750,000 square feet of supply to the submarket. New arrivals or expansions in the third quarter include: Amazon (238,000 square feet), Shaw Industries (235,000 square feet) and Primary Color (204,000 square feet) in the North and West Orange County submarkets.

Sale Prices
The Orange County industrial market's average asking price at the end of the third quarter 2017 came in at just under $261 per square foot (average price tracks 1,000 square foot buildings and larger).  While sale prices vary greatly depending on the size of the building and an average sale price doesn't tell the entire story, this represents an increase of more than 11% from the third quarter of 2016. As interest rates move up we expect to see more modest levels of appreciation in 2018. With that said, both foreign (Asian & Canadian) and domestic interest in Orange County industrial product is as strong as it has ever been. With limited land for new construction, coupled with rising construction costs and a more stringent entitlement process, institutions are paying top dollar for existing Class A assets.

Lease Rates
The average asking lease rate, which incorporates all size ranges and sub-markets throughout Orange County is $0.85 NNN per square foot per month, a one cent per square foot increase from last quarter and a $0.05 cent per square foot increase from a year ago (6.25% annual increase). Although averages are difficult to rely upon, the fact is that rents within certain segments of the market are up 25-40% compared with rents from 2012.

Transaction Activity
The overall lack of available inventory has taken its toll on transaction volume (sales and leases) as gross activity in the second quarter dropped to 4.2 million square feet, down from 4.3 million square feet in the previous quarter. Highlights include Amazon's lease of 238,000 square feet from Prologis at 6400 Valley View Street in Buena Park, Daisy Nails leasing 132,231 square feet at 3335 E. La Palma Avenue in Anaheim (Bentall Kennedy) and Primary Color leasing 204,314 square feet at 11130 Holder Street (former Van's headquarters) in Cypress.

Summary - The Orange County industrial market recorded another stellar quarter, but as demand continues to outpace supply, options are becoming severely limited for Orange County's diverse tenant base. Lease rates and sale prices are breaking through previous record highs across all size ranges and the region's lack of available inventory continues to hinder overall transaction volume. As e-commerce and related logistics/transportation operators emerge as more significant players in this market, industrial demand and competition is at an all-time high. While there were a few 200,000 square foot plus deals inked this quarter, we are seeing a shift to smaller warehouses near the end user/consumer (below 50,000 square feet). Landlords continue to have the leverage in this market and even functionally obsolete buildings, if well located, are seeing a lift in rents. Distribution/logistics tenants seem less focused on their monthly rent and their attention has shifted to other expense pillars of the supply chain like reducing transportation and labor costs. Locating the right infill, or "last mile" location is becoming critically important.

Download the full Orange County Industrial Market Report here: https://www.voitco.com/ftp/OC3Q17Ind.pdf