Market Snapshots – January 2019

Carrie Rossenfeld Market Snapshots

From SoCal Real Estate’s January 2019 issue:

Excerpts from industry reports

Savills Studley’s Q3 2018 Orange County Office Market Report

Overall quarterly leasing activity for Orange County’s office market fell from 1.9 million square feet to 1.5 million square feet in the third quarter of 2018, well below the long-term quarterly average of 2.1 million square feet. Tenants leased 7 million square feet in the four most recent quarters leading up to early October 2018.

Orange County’s overall office availability rate posted a significant quarter-on-quarter increase, rising by 150 basis points from 18.3 percent to 19.7 percent. The class-A rate rose by 140 basis points to 21.3 percent.

The overall average asking rent increased to $35.86, a quarter-on-quarter spike of 1.7 percent. Class-A rent also pushed higher, jumping by 0.8 percent quarter-on-quarter to $39.47.

Office property sales during the first seven months of the year totaled $1.2 billion, a 0.7 percent increase compared to the first seven months of 2017.

Randall S. Parker, senior managing director of Savills Studley, said in the report, “Rent growth has begun to stabilize in Orange County — leasing activity in several submarkets remains strong, with numerous large transactions likely to be completed in Q4. The class-A Airport submarket continues to see rent growth, however at a slower pace than previous quarters. South Orange County’s rent growth has slowed after numerous quarters of significant increase; however, new projects recently delivered or under construction are commanding some of the highest rents in Orange County.”

Marcus & Millichap’s IE Industrial Research Market Report 2H 2018

Industrial supply in the Riverside-San Bernardino metro area has reached its highest point in a decade as net absorption soars, and rent growth is moderating as operators focus on occupancy. Underpinned by its proximity to major distribution routes and densely populated metro areas, the Inland Empire continues to attract the largest industrial tenants in the country. In order to meet robust net absorption, which has averaged nearly 19.5 million square feet over the past four years, developers will push supply growth to the highest point in over a decade.

The new projects are primarily situated along I-215 from Riverside to Perris and from Chino to Rancho Cucamonga, with vast industrial parks such as the Meridian Business Park in Moreno Valley at over 1,290 acres. While a considerable portion of the space is leased to marquee tenants such as Amazon and UPS, the sheer volume of space coming online will initiate a period of rising vacancy and slower rent gains than previous years in the cycle as operators focus on occupancy. However, the size and scope of these projects underpins the world-class scale of the distribution capabilities of the metro, supporting rent growth that will remain above the national average.

Riverside-San Bernardino’s position as a national distribution hub supported the flow of more than $3.2 billion in capital into the industrial market. Transactions in San Bernardino and near the Ontario airport led prices per square foot above $150 while carrying initial cap rates in the mid-5 percent range. Large class-A distribution and warehouse facilities along I-10 and I-215 can exchange ownership in the high-4 to low-5 percent band, driven by institutional capital, particularly New York City and Los Angeles investors. buyers seeking higher returns will target areas in the periphery of the metro in locations between Corona and riverside on Highway 91.

Cushman & Wakefield’s Q3 2018 Office Report for San Diego

Overall market fundamentals remain on solid ground in San Diego. Office occupancy grew another 244,000 square feet across all classes, bringing year-to-date net absorption to over 585,000 square feet. After a slow start to the year, the past two quarters averaged approximately 260,000 square feet of growth — which, based on anticipated office job growth for 2018, is also more along Cushman & Wakefield’s expected absorption path for this year. On the flip side, vacancy did report its first quarterly increase in more than two years but there was a good and expected explanation for that.

Jolanta Campion, Cushman & Wakefield’s Research Director in San Diego, says, “San Diego’s office vacancy ended the third quarter of 2018 at 13.4 percent, an increase of 80 basis points from midyear but still 30 bps below a year ago. This upward shift ended the county’s streak of nine consecutive quarters of decreasing office vacancy but was largely the result of unoccupied new construction — some of which, however, already has future commitments in place. Further adding to the positive side of the equation, the third quarter marked the 17th consecutive quarter of occupancy growth during which tenants have now absorbed 6.5 million square feet combined across all classes.”