Market Snapshots — August 2018

Carrie Rossenfeld Market Snapshots

Excerpts from industry reports from SoCal Real Estate’s August 2018 issue

Savills Studley’s Q1 OC and SD Office Market Report

In Q1, Orange County’s overall quarterly leasing activity decreased from 2.2 million square feet to 1.4 million square feet, falling well short of the long-term quarterly average of 2.1 million square feet. Tenants have leased 7.8 million square feet in the four most recent quarters. Orange County’s overall availability rate jumped by 110 basis points to 19.9 percent during the quarter. The class-A rate increased by 180 basis points to 21 percent, but class-B and -C availability jumped merely 20 basis points to 18.6 percent. The overall average asking rent jumped to $34.30, a year-on-year increase of 9.7 percent. Class-A rent also spiked, rising by 13.2 percent year-on-year to $38.16. Office property sales during the six months trailing February 2018 totaled $1.1 billion, a 25.7 percent decline compared to the previous six–month total of $1.5 billion.

In San Diego, office tenants have leased 4.7 million square feet in the four most recent quarters, well below the long-term average of 6.6 million square feet, and down by 2.1 percent from the last quarter of 2017, totaling 4.8 million square feet. The region’s overall availability rate dipped by 60 basis points to 14.8 percent. The class-A rate fell by 10 basis points, starting the year at 16.7 percent. Overall and class-A rates both fell by approximately 200 basis points year-on-year. Overall asking rent inched up by 0.2 percent from the prior quarter, rising to $2.74 ($32.93 per square foot annually). Rent has fallen by 3.3 percent year-on-year, though. Office property sales during the last six months (through February 2018) totaled $1.5 billion, a 75 percent increase compared to the previous six-month total of $877 million.

Avison Young’s Spring Industrial Market Report

The Southern California industrial region continues to outperform many markets across the U.S., with strong demand, tight supply, and record building activity. As e-commerce businesses target large population and transportation centers, there is considerable warehouse and distribution activity throughout Orange County, Los Angeles, the Inland Empire, and San Diego. Vacancies stand at just 2.2 percent in Orange County, 3.5 percent in Los Angeles County and the Inland Empire, and 4.4 percent in San Diego.

All this leasing activity has caught the attention of investors, who are seeking the stability and solid return of this growing market sector. As developers add new buildings to the market, many are purchased by investors.

In Orange County, 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.

More than 2.1 million square feet of new industrial inventory was under construction in San Diego in eight separate projects. The bulk are located in the North County and South Bay submarkets.

JLL Snapshot: San Diego Unemployment

In the first quarter of 2018, San Diego County hit an 18-year low unemployment rate of 3.2 percent. The market’s unemployment rate has been under 4 percent for the last 7 months. San Diego County is still behind other primary California markets such as Orange County at 2.8 percent, San Francisco County at 2.4 percent, San Mateo County at 2.2 percent, and Santa Clara County at 2.6 percent.

The San Diego job market has added an additional 207,220 jobs since 2000 (the last time the unemployment rate was this low), as well as added 54,250 more jobs (46 percent increase) since the last economic cycle rally from 2000 to 2008. The job market demand from the health care industries have played a big role in the robust job market growth, rising by 44.4 percent in the last ten years.

From comparison to the last peak of 2008, San Diego has added 88,100 jobs in the last 10 years. The 2009-2010 economic downturn saw a significant reduction in job totals from the Great Recession, resulting in a record county high 10.8 percent unemployment rate.

Marcus & Millichap’s Q2 Retail Research Market Report for IE

The Riverside-San Bernardino metro represents California’s fastest growing economy, having added 260,000 jobs over the past five years. This sustained span of diverse employment gains has supported the addition of nearly 200,000 residents during the same period, boosting local demand for housing and conveniently located shopping centers. In response, retailers have been in expansion mode while consumer spending continues to escalate. Grocers and personal service-related companies — namely fitness centers and smaller gyms — have been notably active of late, occupying roughly 1 million square feet of combined space in 2017. As retailers continue to scramble for space amid strong economic growth, vacancy will hold at a cycle-low level, prompting rent gains.

A rise in retail completions is occurring in 2018, yet deliveries are sparse within the Inland Empire’s largest cities, including San Bernardino, Fontana and Rancho Cucamonga. Instead, roughly half of this year’s deliveries are in Rialto, outlying Hesperia, and the Coachella Valley. Overall, at least 70 percent of this year’s new supply is preleased, heightening retailer demand for existing space.