Blog #orange county

Key Points:

• Industrial space demand in Orange County declined for the ninth straight quarter in Q1.
• Asking rents dropped nearly 10% during the quarter.
• Net absorption was negative at 626,940 square feet in Q1.
• Previous absorption declines: 5.2 million SF in 2024 and 2.6 million SF in 2023.
• Countywide vacancy rate increased from 1.8% (record low) to 5.8% over two years.
• Business caution, fueled by last year's issues and election-related tariff concerns, continues to limit growth.

·  Industrial space demand has softened, raising the vacancy rate from 1.8% to 5.5% over eight quarters. 

·  Net absorption in 2024 hit its lowest level in over a decade. 

·  Rental rates continued to decline throughout 2024. 

·  Available sublet space reached a record high. 

·  Tenant activity remains weak, indicating slower business growth plans. 

·  Market uncertainty is tied to the U.S. elections and potential tariff impacts. ·

  Leasing activity fell 5.3% for the year, with Q4 down 28% from 2023. 

·  Orange County’s net absorption was negative 1.19 million SF in Q4 and negative 5.27 million SF for the year.

• Demand for industrial space weakened countywide in Q3, with an increase in sublet space.
• Vacancy rates are the highest since 2013 but still 200 basis points below the national average.
• The decline in net absorption is the largest year-to-date drop in 15 years.
• Average rents fell for the seventh consecutive quarter.
• Countywide negative net absorption in Q3 totaled 1.3 million SF, bringing the annual total to 4.1 million SF, the highest since the 2008 financial crisis.
• The average triple-net rental rate dropped to $1.59 per SF, down from the $1.71 peak at the end of 2023.
• Q3's 5% vacancy rate is an increase from 2% in Q1 2023.

• Easing tenant demand has led to a significant increase in available industrial space in Orange County.
• Total available space has almost doubled, reaching 18 million square feet over the last 18 months.
• Both direct and sublet space have contributed to this increase, with sublet space nearly doubling to 3.3 million square feet.
• New construction has also played a role, adding 2.6 million square feet of space last year.
• As a result, the countywide vacancy rate has risen from a record low of 1.8% in Q4 2022 to 4.1% by the end of Q1.
• Negative net absorption was observed in three out of four major submarkets in the county during Q1.
• Rent growth has slowed to 2.5% year over year, offering some relief to Orange County tenants.
• The current triple-net county average rent is $1.66 per square foot, reflecting a 126% increase over the past decade.

The industrial real estate landscape in Orange County has experienced a notable shift in the fourth quarter of 2023, marked by a noticeable impact on rental dynamics. The moderation in tenant demand has contributed to a increase in vacancy rates during this period thereby leading to a deceleration in rent growth. This shift in market dynamics has implications for both property owners and tenants, shaping the overall economic landscape of the region. 

One of the noteworthy industrial real estate transactions during Q4 of 2023 was the acquisition of 7050 Village Drive in Buena Park, CA, by Buchanan Street Partners. This move underscores the strategic investment decisions being made in response to the evolving market conditions. Additionally, Home & Body Co.'s leasing of 5800 Skylab Road in Huntington Beach, CA, reflects ongoing activity with industrial real estate warehouse buildings, albeit with a focus on leasing arrangements. 

Analyzing specific areas with Orange County warehouse and industrial properties, the sales prices have exhibited distinct trends. Huntington Beach, for instance, has seen an average price of $380.00 per square foot (PSF) over the past year. This figure provides valuable insights into the relative strength of the market in this particular locale. In comparison, Garden Grove has experienced a slightly lower average sale price at $320.00 PSF, indicating variations in the pricing dynamics across different parts of the county. 

Furthermore, lease rates with Orange County industrial properties averaged $1.58 per square foot during the fourth quarter of 2023. This figure serves as a benchmark for property owners and tenants alike, offering a glimpse into the prevailing economic conditions shaping leasing negotiations. The asking lease rates provide crucial information for businesses seeking commercial spaces, influencing decisions on location and affordability. 

In summary, the industrial real estate landscape in the Orange County market is adapting to changing demand patterns, with notable transactions and pricing trends providing valuable insights for industry stakeholders. As the market navigates through these shifts, strategic decision-making and a nuanced understanding of local dynamics will continue to be key elements for success in the region's real estate sector.

The demand for industrial space from tenants in the third quarter showed a continuous decline, with the Orange County Industrial Market experiencing a negative net absorption of 848,736 square feet. This negative absorption is the most significant since the first quarter of 2019. Furthermore, it marks the third consecutive quarter of contraction, resulting in a total negative absorption of 1.8 million square feet for the year. Countywide, the vacancy rate increased by 40 basis points, reaching 3%, the highest it has been in the past 10 quarters. 

Despite these challenging trends, the average rent for industrial spaces has seen an 11% year-over-year increase. However, Lee & Associates' agents have observed a growing trend of landlords offering concessions on new lease agreements and lease renewals. This shift in landlord behavior suggests that they are becoming more attuned to the weakening demand in the market. 

While it may appear that leasing activity is on the decline, the industrial real estate market remains active. There is a notable presence of prospective buyer-users who remain undeterred by the rising interest rates. This indicates that even with the challenges posed by increased vacancies and negative net absorption, there is still considerable interest and activity in the market from those looking to purchase and utilize industrial spaces, especially in Orange County.

A prevalent and unifying trend has emerged in the industrial markets of Greater Los Angeles & Long Beach, Orange County, and the Inland Empire during the third quarter of 2023: an uptick in vacancy rates. This development has undoubtedly captured the attention of real estate observers, raising questions about the resilience of these markets amidst evolving economic conditions.

While it's true that asking lease rates and sale prices have moderated from their previous peaks, they continue to hover at historically elevated levels. This is particularly noteworthy in the realm of leasing, where the prevailing rates are higher than what has been observed in the past. The apparent contrast between increased vacancies and persistent high asking rates creates an intriguing narrative within these markets.

The question that naturally arises is whether this shift in vacancy rates is a direct consequence of the recent Federal Reserve interest rate hikes or if it's a temporary slowdown in the market's momentum. The answer to this query remains somewhat elusive, and much like the economic outlook itself, it is subject to ongoing observation and analysis.

One plausible hypothesis is that the impact of the Federal Reserve's interest rate hikes has yet to fully materialize. These hikes may have prompted businesses and investors to reevaluate their strategies, potentially leading to a pause in leasing and purchasing activities. The full ramifications of such monetary policy decisions often take time to ripple through the real estate sector.

On the other hand, it is equally plausible that the observed increase in vacancy rates is a transient phenomenon. Industrial markets are influenced by a myriad of factors, including supply and demand dynamics, economic cycles, and regional conditions. Short-term fluctuations are not uncommon, and they may not necessarily indicate a fundamental shift in the health of these markets.

As we move forward, close monitoring and analysis of these markets will be essential to provide a more definitive answer. Factors such as employment trends, trade activity, and consumer behavior will play a pivotal role in shaping the trajectory of these industrial markets. Whether the current situation is a harbinger of sustained change or a brief pause in the continued growth of these markets will be revealed in the coming quarters, offering valuable insights into the ever-evolving real estate landscape.

Some easing of demand in the 2nd quarter of 2023, see below for more.

The industrial real estate market in Orange County, CA is continuing to experience high demand with low vacancy rates. The region’s industrial market is primarily focused on manufacturing and distribution, with industries such as aerospace, defense, and technology driving the demand for space. 

In Q1 of 2023, the average asking rent for industrial space in Orange County was around $1.64 per square foot, which is slightly higher than the Southern California average. Despite the higher rental rates, the market remains attractive, with limited availability and a high demand for industrial properties. 

Overall, the industrial real estate market in Orange County, CA is currently strong, and is expected to continue to attract demand from a range of industries due to its strategic location, desirability and proximity to major transportation routes.

Continued low vacancy rates drove higher lease rates in the 4th quarter of 2022 despite the economy slowing in other areas.

The Orange County Industrial Market continues to post record sale prices and lease rates due to continued strong demand.

Low inventory levels in the Orange County Industrial real estate market and high demand leads to continued increases in lease rates and sale prices.