ORANGE COUNTY, CA—With firms reporting strong absorption, minutevacancy rates and increasing rental rates, fundamentals for theindustrial sector in Orange County are strong. Oneof the reasons this sector has recovered so well and continues tobe healthy is because inventory never got out of hand, experts tellGlobeSt.com.

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“Industrial was never overbuilt like office,” says KurtStrasmann, senior managing director ofCBRE. “Vacancies are at historic lows. Mostnoteworthy is we're seeing 5% to 10% annual rental growth, and thiswill continue.”

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Strasmann adds that broad-based tenant demand fromretail and logistics users, inaddition to straight distribution andmanufacturing, have contributed to the sector'shealth. “We track 51 markets in the US, and Orange County has thesecond-lowest vacancy rate in the nation. Vacancy was kept incheck, and ground-up development opportunities in Orange Countyhave been very difficult to find.”

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CBRE's Q3 report shows that the vacancy rate for Orange Countyhit a low of 2.4%, citing demand for quality class-A space frommanufacturing tenants in the medical-device, food and garmentsectors. High demand and low availability of space allowed thoseprojects to obtain a lease rate at a 10% to 15% premium relative tothe market. Overall asking lease rates for the county increasedonly slightly in Q3, but still posted a 3% year-over-year increase.The past three years have been very steady with rising industriallease rates, especially for the class-A space. Moving forward,class-B space will experience the same rental appreciation due tothe recent activity and strong fundamentals, according to CBRE.

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Currently there are a fewground-up development projects recentlycompleted or in the process of constructioin that will come online.Strong tenant/buyer demand will absorb all the new space and more,says Strasmann. Job growth is moving “slowly but surely. It's beena very slow and steady recovery, which is a healthy recovery ledinitially by corporate America but now has expanded into theprivate sector (big and small companies). Buildings in the10,000-square-foot to 50,000-square-foot range have been veryactive.”

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CBRE also reports that at the end of Q3, there was approximately1.1 million square feet of industrial space under construction.Additionally, 208,021 square feet were delivered to the market, allof which was in the Anaheim Concourse Distribution Center. AsGlobeSt.com reported last week, wholesale flooringdistributor Longust Distributing has signed thefirst lease at Anaheim Concourse,1.4-million-square-foot, master-planned project currently indevelopment by Panattoni DevelopmentCo. and Clarion Partners. JonesLang LaSalle Orange County's senior managing directorLouis Tomaselli, SVP Zach Nilesand SVP Steve Wagner represented Longust in thetransaction, while the landlord JV was represented byCBRE's SVP Brad Bierbaum.

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Lack of available development sites and caution from developerscaused the pace of new construction to remain at a modest leveldespite strong demand in the market, according to CBRE. Theavailability of land will continue to be an issue in the nearfuture due to increased competition from residential developers,the firm predicts.

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Tomaselli tells GlobeSt.com the market is going to remain strongfor industrial for a longer period than predicted because of theequilibrium between supply and demand/absorption. “Demand istempered, but we don't really know why.”

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Tomaselli says the actual vacancy rate may be even lower thanreported if one considers truly available space. The number ofinventory alternatives has fallen from a high of 65 in 2008 to justabout 20 today. Also, lease rates have grown in response to thelimited inventory and heightened demand, from an average of $.45triple-net per square foot in 2008 to $.65 per square foot today, a44% increase over six years or 7.3% per year, even though it didnot grow linearly.

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“While there are 36 inventory alternatives greater than100,000 square feet on the market today, only 19 are deliverable;the rest are either in escrow, leased out, under construction orplanned,” says Tomaselli. “The 19 buildings total 2.61 millionsquare feet, which, divided by a base of 256 million square feet,equates to a 1.25% vacancy rate.” While one would draw theconclusion that a 1.25% vacancy with 19 alternatives would causelease rates to skyrocket, tenant demand seems to be modulating tomatch the inventory. “While we are seeing multiple offers, much ofthat is owner-occupier purchase demand or 3PL activity, whichtypically is amplified since multiple 3PLs chaseeach client requirement, but only one 3PL wins the business andneeds the space.”

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He adds the sweet spot in Orange County has been space in the100,000-square-foot to 200,000-square-foot range, where 80% oftransactions greater than 100,000 square feet have fallen.

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Another reason why rental rates have been able to increase isbecause tenants are less focused on small differences in rentalrates and more focused on the functionality and efficiency of thespace, says Tomaselli. “Tenants are focused on the features andbenefits of new buildings. They're not arguing over rent, but theyneed it to be an effective cube with 32-foot clear, and they needas much cube as they can get in a building. They're also lookingfor large truck courts that allow for trailer space. Those are thetwo big trends we're hearing. They can still negotiate rent inclass-B buildings, but those buildings will haveinefficiencies.”

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.