IRVINE, CA—With ever-shrinking vacancy rates in both the office and industrial sectors of Orange County, development is the next logical step. But Voit Real Estate Services' VP of market research Jerry Holdner tells GlobeSt.com finding land to construct new buildings is a major challenge for developers.

As GlobeSt.com reported last week, the Orange County office market showed continued signs of recovery in the third quarter of 2014, posting just under 600,000 square feet of positive net absorption, and the county's industrial market showed significant positive absorption for the year with a two-cent or 3.2% increase in asking lease rates and drops in both vacancy and availability, according to Voit. And Holdner tells GlobeSt.com the office vacancy rate is at 12.5%, and 12% is the point at which the cranes typically come out.

“The industrial vacancy rate is the lowest it's ever been,” says Holdner. “I had to go back to the second quarter of '98 to find the same amount of vacant space. We're going to probably see more construction; the problem is finding sites to build these buildings. Most of the larger industrial sites have been converted to condominium high-rises. The demand is definitely there, though, and once lease rates get high enough and it pencils, we'll see a lot of older buildings bought and scraped or just improved.”

Holdner adds much of the industrial redevelopment to take place will be in older, obsolete industrial buildings since it's difficult to switch another use to industrial. It usually goes from industrial to a better and higher use—not the other way around.”

And most of this type of redevelopment will likely take place in North County along the 91 corridor, since much of South County's industrial space is newer, says Holdner. “Some 60,000-square-foot and 80,000-square-foot construction has been delivered in North County at the old Boeing site, but it has been gobbled up.”

In response to experts talking about distribution centers moving closer to—and even into—retail centers. Holdner says, “You'll see some of that for sure going forward. A lot of retail will be on the outline of the industrial districts, so I can definitely see that happening. Many retailers, with retail space so expensive, want to take as little of that as they need for a showroom and take more of the cheaper distribution space nearby or behind it. And with that Amazon.com model of same-day delivery for everything, it's going to make sense.”

On the office side, Holdner says the Irvine Co. completed its office tower in Fashion Island earlier this year and is asking for unusually high—although unpublicized—rents because the vacancy rate is near 0%. However, not many tenants are biting just yet—there's even a rumor that Bill Gross, founder of PIMCO who recently left the firm and joined Janus Capital Group Inc., found the upper floors of the tower too rich for his blood, says Holdner.

But more office development will occur. Holdner says the Irvine Co. is talking about starting up another tower, possibly in the Jamboree Center, and there's talk of another office site near UCI. “Companies are out kicking tires and looking at sites. It's the same challenge for industrial as for office—finding land on which to build.”