Lack of Distribution Facilities Fosters Demand

IRVINE, CA-With the first big-box industrial lease of the year signed in Orange County, as GlobeSt.com reported last week, one wonders if others are soon to follow. However, if we take a look back at the number of true big-box distribution leases that were signed over last couple of years, it's not likely that many more are in-the-works for this year.
Zach Niles, SVP industrial real estate advisory and brokerage operations for Jones Lang LaSalle, tells GlobeSt.com that only six new, organic industrial transactions over 100,000 square feet were completed in Orange County in 2012, and of those, only four were for true distribution assets. In 2013, the total number of big-box transactions rose to ten, but only three were true distribution deals.

"You could attribute this low number to the lack of class-A and true distribution facilities available in Orange County," says Niles. "The hottest product type is 100,000- to 200,000-square-foot space, which is nearly nonexistent, and the availability is nil."

Aside from new product coming out of the ground from Panattoni in East County, Western Realco in Brea and a nearby one-off private owner, not much big-box development is to be found. The new space is due for completion between the end of Q2 2014 and mid-2015, but the square footage coming online is nowhere near where it needs to be to meet demand, says Niles. "Demand is outpacing availability."

Even with the new deliveries, rental rates are expected to be strong in big-box industrial in the near future, with 7% to 8% growth this year and between 5% and 7% growth in 2015, Niles says.

From an investment standpoint, market capital continues to outpace opportunity in this sector. "There are no portfolio opportunities in Orange County," says Niles. "It's a one-off acquisition and portfolio type of market."

When asked if the draw of investors to the Inland Empire for big-box opportunities is having any negative impact on the Orange County market, Niles replies with an emphatic no. "Not at all. Orange County is a land-constrained market. We're tearing down functionally obsolete buildings and rebuilding them to try to meet demand. Orange County is a very strong market, but there are barriers to entry, and also, industrial is giving way to higher and best uses such as residential and retail."