Colliers Says Industrial Market Made Gains in the Second Quarter

IRVINE, CA-Demand for industrial buildings in Orange County continued to gain momentum, and confidence grew among developers as a slow but steady economic recovery continued to unfold during the second quarter of 2013. The recovery has fueled competition, raising rents and lowering vacancies for companies seeking to lease or purchase class A industrial space, according to Colliers International's second quarter industrial real estate report.

Total gross market activity during second quarter increased to 3.6 million square feet from 2.4 million square feet reported in the first quarter, the report said. Compared to the second quarter of 2012, gross market activity was 35.3 percent higher in the second quarter of 2013, underpinning the strength of the recovery, noted Colliers regional president Martin Pupil, who oversees all brokerage operations in the company's Southwest Region.

As the economy gains momentum, and Orange County continues to see a tightening market with just a handful of new industrial projects underway, the most pronounced shortage and greatest demand remains in class A buildings, the Colliers quarterly report revealed.

“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,” said Pupil.  “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 hesitant to build speculatively, although we are beginning to see an uptick in developers willing to take that risk.”

Colliers' report also disclosed that market fundamentals in the Orange County industrial market were influenced by strong activity in buildings ranging from 10,000 to 39,999 square feet, enabling the recovery to steadily gain traction during the past two quarters, which was reflected by a net absorption rate of 344,600 square feet during the period surveyed.

“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,” added Colliers executive managing director John Hollingsworth.  “Although there was only slight movement in quarterly vacancy rates, we are still seeing them drop and that is another sign of market improvement.”

Vacancy rates for industrial properties fell during the second quarter to 4.6%, compared to 4.8% in the first quarter, the report noted. During the same period one year ago, industrial vacancies in Orange County stood at 4.7%.

“Industrial firms in Orange County have always paid a premium to locate here for a variety of reasons,” said Hollingsworth. “It is one of the most sought-after locations by high-tech and bio-tech firms due to its proximity to a highly educated workforce, an abundance of housing, good schools, world-class cultural amenities and access to top-notch research and teaching universities.”

As a result of the strengthening demand and lack of supply, the weighted average asking monthly rental rate rose 3.4% to 60 cents per square foot for triple-net properties, compared to 58 cents per square foot reported a year earlier, according to Colliers' research data.  

“Just to show how cautious developers are being and how tight the Orange County market is, there was only one newly constructed building delivered to the market during the second quarter,” said Hollingsworth. “If the recovery fully takes hold, and more land becomes available, we should see a spike in new development. We know demand is there, but the product is not.”

According to the Colliers report, Orange County's industrial market now comprises 192.7 million square feet, representing 17% of the total industrial space in the greater Los Angeles basin. Some 68% of the space is made up of small-to-medium-sized buildings, with the balance in big “box space” buildings of 100,000 square feet or more. The market includes many mid-sized manufacturers and distributors from a wide array of industries.

Colliers International is a global leader in commercial real estate services, with over 13,500 professionals operating out of more than 482 offices in 62 countries.