IRVINE, CA-Demand for industrial space that can house small to medium-sized business is on the rise in Orange County, reflecting the overall health of the sector, according to a recent report from Colliers International. GlobeSt.com recently caught up with Martin Pupil, southwest region president of Colliers, to discuss what the firm's report may not show.

GlobeSt.com: What is the best news to come out of your firm's second-quarter industrial-property report for Orange County?

Martin Pupil: The most positive factor to look at is that total gross market activity during the second quarter of the year increased to 3.6 million square feet from the 2.4 million square feet reported in the first quarter. The needle is moving in the right direction. And when we look at the second quarter of this year compared to last year's second quarter, gross market activity increased over 35% higher in the second quarter of 2013. But none of that erases the fact that there are just a handful of new industrial projects underway right now, with the most pronounced shortage and greatest demand remaining in class-A buildings. And there is a lot more to the story here.

GlobeSt.com: What is the rest of the story that the numbers may not show us?

Pupil: What we are seeing in Orange County, with a few exceptions, is a microcosm of what we are seeing throughout the region, and that is strong demand for industrial properties that can house small to medium-sized businesses. In addition to that, we cannot find enough product to meet demand in the 100,000-square-foot or “big-box” range because developers have been reluctant to build speculatively, although we are beginning to see an uptick in developers willing to take that risk—not here, but nearby.

GlobeSt.com: Strong absorption in buildings between 10,000 square feet and 40,000 square feet has enabled the recovery to steadily gain traction during the past two quarters. What exactly does that say about the market going forward?

Pupil: In 11 of the past 12 quarters, we've experienced positive net absorption, and that is a strong sign that the economy and the industrial market are improving. But there are some cautionary notes that need to be added. Although there was only slight movement in quarterly vacancy rates, we are still seeing them drop, and that is another sign of market improvement. But deals take longer to complete, requirements are often so tough to meet that tenants may look outside the region, and financing is still an issue.

GlobeSt.com: Is the market gaining momentum?

Pupil: In Orange County, there has been a significant recent spike in industrial activity that should be looked upon as all positive, but again, many of the deals we are closing now started, in some cases, a few years ago before the recovery was even as strong as it is now. Two recent transactions—one a lease for Arlon Graphics and one a purchase for HORIBA Instruments—come immediately to mind. When you look beneath the surface of these deals, you can see how challenging they were, how much time they took to complete, and a lot of details only those intimately familiar with them would know.

GlobeSt.com: So, what you are saying is that the days of the old straightforward lease or purchase for an industrial building are over?

Pupil: Not necessarily, but the economy and its lackluster performance have set the milieu for all of our transactions. In the background of all the deals is the economy and what it is going to do. Many clients are being cautious as they wait to see what the economy is going to do.

GlobeSt.com: Are these deals taking more time, and are they more complicated because of the economy or because they are just complicated deals?

Pupil: That's what I was saying about the milieu, or backdrop, in which we find ourselves working. Looking closely at the Arlon and HORIBA transactions and others we are doing from the San Francisco Bay Area and the San Fernando Valley to San Diego and east to Arizona and New Mexico, I see there are shared market characteristics. Tenants and buyers are being cautious. No one is jumping up and down over the economic recovery just yet, and I don't know if they ever will be because this recovery has been weaker than anyone expected. But, everyone's happy the needle has moved into positive territory.