ORANGE COUNTY, CA—With firms reporting strong absorption, minute vacancy rates and increasing rental rates, fundamentals for the industrial sector in Orange County are strong. One of the reasons this sector has recovered so well and continues to be healthy is because inventory never got out of hand, experts tell GlobeSt.com.

“Industrial was never overbuilt like office,” says Kurt Strasmann, senior managing director of CBRE. “Vacancies are at historic lows. Most noteworthy is we're seeing 5% to 10% annual rental growth, and this will continue.”

Strasmann adds that broad-based tenant demand from retail and logistics users, in addition to straight distribution and manufacturing, have contributed to the sector's health. “We track 51 markets in the US, and Orange County has the second-lowest vacancy rate in the nation. Vacancy was kept in check, and ground-up development opportunities in Orange County have been very difficult to find.”

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

Currently there are a few ground-up development projects recently completed 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 been a very slow and steady recovery, which is a healthy recovery led initially by corporate America but now has expanded into the private sector (big and small companies). Buildings in the 10,000-square-foot to 50,000-square-foot range have been very active.”

CBRE also reports that at the end of Q3, there was approximately 1.1 million square feet of industrial space under construction. Additionally, 208,021 square feet were delivered to the market, all of which was in the Anaheim Concourse Distribution Center. As GlobeSt.com reported last week, wholesale flooring distributor Longust Distributing has signed the first lease at Anaheim Concourse, 1.4-million-square-foot, master-planned project currently in development by Panattoni Development Co. and Clarion Partners. Jones Lang LaSalle Orange County's senior managing director Louis Tomaselli, SVP Zach Niles and SVP Steve Wagner represented Longust in the transaction, while the landlord JV was represented by CBRE's SVP Brad Bierbaum.

Lack of available development sites and caution from developers caused the pace of new construction to remain at a modest level despite strong demand in the market, according to CBRE. The availability of land will continue to be an issue in the near future due to increased competition from residential developers, the firm predicts.

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

Tomaselli says the actual vacancy rate may be even lower than reported if one considers truly available space. The number of inventory alternatives has fallen from a high of 65 in 2008 to just about 20 today. Also, lease rates have grown in response to the limited inventory and heightened demand, from an average of $.45 triple-net per square foot in 2008 to $.65 per square foot today, a 44% increase over six years or 7.3% per year, even though it did not grow linearly.

 “While there are 36 inventory alternatives greater than 100,000 square feet on the market today, only 19 are deliverable; the rest are either in escrow, leased out, under construction or planned,” says Tomaselli. “The 19 buildings total 2.61 million square feet, which, divided by a base of 256 million square feet, equates to a 1.25% vacancy rate.” While one would draw the conclusion that a 1.25% vacancy with 19 alternatives would cause lease rates to skyrocket, tenant demand seems to be modulating to match the inventory. “While we are seeing multiple offers, much of that is owner-occupier purchase demand or 3PL activity, which typically is amplified since multiple 3PLs chase each client requirement, but only one 3PL wins the business and needs the space.”

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

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