The Summit in Aliso Viejo, California | Courtesy a representative of NKF Capital Markets

Market Snapshots – October 2018

Carrie Rossenfeld Market Snapshots

From SoCal Real Estate’s October 2018 issue:

Excerpts from industry reports

CBRE’s Orange County Q2 Reports: Industrial, Office, Retail

Class-B industrial product was the space of choice for many Orange County users in the absence of class-A product, while well-located class-C product garnered a wealth of activity in Q2. The dynamics of solid activity, rising rents, and limited available supply kept the market heavily slanted in landlords’ favor. New construction stats during the quarter totaled 1.2 million square feet.

Retail-wise, since the beginning of 2018, more than 85 million square feet of shopping-center real estate and nearly 1.9 million square feet of retail space have been leased in Orange County. Furniture and fitness occupiers once again led leasing in the region — lease rates increased by 3.9 percent from last quarter to $2.42 per square foot. As many large retailers such as Petco, 99 Cents Only, and Toys “R” Us bowed out of the market, hungry retailers are quickly backfilling the space looking to edge into an already-tight market. Vacancy rate and lease rate for the region will stay relatively stable for the next 12 months.

Occupiers in the Orange County office market were drawn to amenity-rich buildings in central locations, and landlords latched onto that trend and focused on renovations and increased asking rates. The Orange County asking lease rate of $2.90 per square foot per month equaled the prior quarter but grew by 5.5 percent year over year. Vacancy is well below the 10-year 13.2 percent average and trending downward, with rapid leasing among newly completed office buildings.

JLL’s San Diego Q2 Industrial Insight

In North County San Diego, as industrial development continues, midyear deliveries have seen minimal preleasing thus far. Defense/aerospace and breweries were robust in leasing during the quarter, including build-to-suit properties. Besides East County’s lackluster demand, the overall industrial market is poised to outpace the annual demand of the last two years.

As four projects were delivered in Q2, the market saw an additional four break ground. Q2 deliveries included 338,415 square feet at 100 percent preleased in Poway (I-15 Corridor) and 297,118 square feet at zero percent preleased in Carlsbad. The new projects that broke ground consisted of 261,960 square feet in Otay Mesa, 117,528 square feet in Oceanside, and 77,860 square feet in Vista. On behalf of the 561,699 square feet of deliveries in Carlsbad and Oceanside, only 24.9 percent has been preleased when completed in 2018. Projects currently under construction in Oceanside and Carlsbad are a combined 19.7 percent preleased.

The largest move-in for Q2 was the delivery of Ridgeview Business Park in Poway (302,500 square feet) that was preleased to General Atomics. Q2’s industrial leasing was robust for defense/aerospace, consisting of the renewals of General Atomics’ 273,000 square feet in Otay Mesa, BAE Systems for 86,254 square feet in Southeast, and LRAD Corporation’s new lease for 54,964 square feet in Rancho Bernardo.

9965 Carroll Canyon Road in San Diego | Courtesy a representative of JLL

Voit Real Estate Services’ IE Q2 Industrial Report

After adding another 9.69 million square feet to the Inland Empire industrial base in Q2 2018, the market has seen a large increase in the volume of construction over the past year and a half, having delivered 22 million square feet of industrial product in 2017, a 22 percent increase over the total space delivered during the previous year and leading the national average. With industrial rents, tenants have been faced with sticker shock when looking to renew leases in recent years, with rent prices continuing to soar in Southern California amid tight occupancy and robust demand. Still, asking rents for bulk-distribution properties remain 40 percent lower than in Los Angeles and Orange County.

Vacancy rates continued a downward trend in Q2 across all property types. The vacancy rate decreased in Q2 to 4.32 percent, down from the Q1 2018 rate of 5.11 percent. And from a historical perspective, the second quarter vacancy rate was lower than the 5.29 percent average recorded since the beginning of Q1 2007. The Inland Empire’s West submarket boasts the lowest vacancy in the region at 2.98 percent.

Despite the introduction of new supply, demand has been consistently strong, keeping vacancies low for the past three years and yielding rent growth in the market. However, over the past four quarters, rent growth has started to level out, registering 9.43 percent per year.

While asking rents in the Inland Empire stand at an all-time high for the market, the region remains more affordable than neighboring infill markets Los Angeles and Orange County. Average asking lease rates are now at $0.58 for Q2 2018, up an average of three cents per square foot from the same quarter last year and six cents per square foot over Q4 2017 figures. Expect further rent increases of at least 3 percent to 4 percent on an annual basis throughout the year.

1300 California St. in Redlands, California | Courtesy a representative of Newmark Knight Frank