1730 South Anaheim Way in Anaheim, California, which just sold to American Realty Advisors, was completed in Q1. | NKF Capital Markets

Limited Supply, Growing Demand for OC, SD Industrial

Carrie Rossenfeld Industrial

The Orange County industrial market remained tight in the first quarter of 2018 as record-low vacancy persisted, pushing rents to record highs, reports Avison Young (AY). Even with a modest spike in the construction of speculative inventory, supply is trailing demand.

The high-tech industry, aerospace, retail, distribution and manufacturing continue to drive demand in the industrial market. The population is growing steadily year-over-year, while unemployment remains low at 3.3 percent as of the first quarter of 2018.

The industrial vacancy rate for the first quarter of 2018 remained extremely low at 2.2 percent in Orange County after a modest increase of 20 bps year-over-year, the firm reports. Industrial tenants seeking new space can expect a challenge as the number of options decline. The only industrial property currently under construction in the market is Beckman Business Center, a seven-building industrial park located in Fullerton, California. The project will bring a total of 934,800 square feet of speculative space to the market by mid-year 2018. Meanwhile, a 143,930-square-foot build-to-suit for Rosendin Electric at 1730 South Anaheim Way in Anaheim — which, as SoCal Real Estate reported on May 8, was sold to American Realty Advisors — completed construction during the first quarter of the year. There is approximately 800,000 square feet of proposed development, spread among five projects, waiting to commence in the market.

As demand for industrial space increases in Orange County, larger tenants increasingly look to options in the neighboring Inland Empire, the state’s powerhouse of industrial inventory, AY reports. However, last-mile warehousing is an unavoidable necessity within Orange County as consumer expectations grow along with the population in this affluent county. In addition, as SoCal Real Estate reported on April 12, industrial vacancy is also low in the IE market, falling to just above 3 percent at the end of Q1.

AY says the total net absorption in Orange County reached 780,000 square f for the 12-month period through the first quarter of 2018, contracting from nearly 1.2 million square feet in the prior 12-month period. Rental rates during the first quarter of 2018 climbed to $11.04 per square foot, up from $10.08 per square foot at the same time in 2017. Rental rates have exceeded levels achieved at the height of the market prior to the last recession and are expected to grow further while limited new inventory is anticipated in this desirable and geographically vital market.

Farther south, the San Diego region is benefiting from its proximity to Mexico, AY reports. San Diego’s industrial market is commanding premium rental rates while demand for limited supply encourages new development and increased sale pricing. The region’s established industrial base supports the military, aerospace, precision manufacturing, and advanced-technology sectors, and its long-term resilience is driven in part by its desirable geography within Southern California, which also makes it a vital hub for logistics with Mexico. The area also gains from sharing the world’s busiest international land border crossing with Mexico. Local employment increased year-over-year as unemployment dropped to 3.5 percent in the first quarter of 2018 from 4.2 percent in first-quarter 2017.

According to AY, industrial vacancy in San Diego fell 50 bps year-over-year to 4.4 percent in the first quarter of 2018. Vacancy has remained below 5.5 percent for the past three years, and there was minimal construction activity during that time. As of the first quarter of 2018, construction projects have gained momentum. More than 2.1 million square feet of new industrial inventory was under construction in eight separate projects around the county, with the bulk located in the North County and South Bay submarkets. The largest project is the Carlsbad Oaks North business park located in East Carlsbad. Three separate buildings located in Carlsbad and Oceanside completed construction during the first quarter, adding 328,500 square feet of new inventory. As developers become emboldened to take on new projects where limited opportunities are available, vacancy is expected to edge upward.

Total net absorption for the 12-month period ending with the first quarter of 2018 was 857,781 square feet, up from 459,047 sf in first-quarter 2017, says AY. Asking rental rates averaged $11.40 per square foot in Q1 2018, down slightly from $11.52 per square foot one year earlier. While rents have reached a plateau during the past two years, they are still at historic highs and are expected to remain flat as the market adjusts to the newly added inventory.