Research - JULY 30, 2018

Industrial space vacancy remains at historically low levels

by Andrea Zander

In the second quarter, the Orange County industrial market reported 480,344 square feet of net absorption, as users have remained optimistic about the overall economy, according to Transwestern.

Despite development rising to just over 1.5 million square feet, the market remains severely supply constrained with overall vacancy at a miniscule 1.4 percent. While recent news about rising tariffs is worrisome, most occupiers, owners and investors have taken a wait-and-see approach. However, the next one to two quarters will be crucial in determining whether rising protectionism will lead to a permanent slowdown or even an end to the current economic expansion.

According to the Commerce Department, total monthly retail sales grew 0.8 percent in May 2018, while the June PMI reading of 60.2 from the Institute of Supply Management shows that U.S. manufacturers remain highly optimistic about the short-term business environment. In terms of combined loaded container volumes, a total of 4.93 million TEUs moved through the ports of Los Angeles and Long Beach in the first five months of 2018 (a 4.3 percent increase over the same period in 2017). Both ports reported surging volumes as both U.S. and Asian manufacturers expedited their deliveries before retaliatory tariffs could be applied. Altogether, these economic indicators indicate an economy and industrial real estate market that both continue to be strong for now.

Quarterly net absorption of 480,344 square feet brought year-to-date net absorption up to 638,153 square feet, a huge improvement from the –331,209 square feet of net absorption reported in the first half of 2017. The largest leases signed in the second quarter involved Lexor leasing 187,696 square feet in Westminster.

A total of just over $528 million in industrial building sales was reported in the second quarter, which brought year-to-date sales volume up to $732.1 million in the first half of 2018 (up 12 percent over the same period in 2017). The largest sale of the quarter involved Hines and Oaktree Capital Management acquiring the five-building, 576,234-square-foot Beckman Coulter Campus in Brea for $115.25 million ($200 per square foot).

The primary concerns from occupiers, owners and developers in the Orange County industrial market remain the continued high price of land and construction costs, and the difficulty on the part of industrial users to attract and retain labor amidst record-low unemployment. With lower-cost Inland Empire submarkets such as Corona and Chino being so close, some occupiers have been looking more closely at moving eastward to streamline operations or even acquire their own buildings at a discount to what they would otherwise pay in Orange County. Going into the second half of 2018, port volumes, consumer spending and key industrial real estate metrics such as sublease availability will be watched very closely to determine whether there is any slowdown locally, Transwestern expects.



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