Industrial Demand Slows, Vacancy Rises

ORANGE COUNTY, CA-The county’s industrial market has held up better than its office counterpart throughout the recession, but it has slipped into negative net absorption and higher vacancy as a result of slowing demand, according to new market reports. Both Voit Commercial Brokerage and CB Richard Ellis cite the continuing pressure that the recession and the turmoil in financial markets have placed on the county’s industrial market, which totals nearly 250 million square feet.

Voit pegs the year-end vacancy at 4.48%, still a relatively low number but higher than it was a year ago when it was 3.92%. CBRE lists the vacancy rate at 4% and notes that the overall availability rate is 8.2% when sublease space is included in the calculation. Voit shows 8.6% availability. The figures from the two firms tend to vary in some respects because they track slightly different inventory and Voit reports separately on the R&D portion of the industrial market.

Nonetheless, the quarterly and year-end surveys by both firms show a weakening in the industrial market, which is historically one of the strongest in the country because of solid demand and the lack of land on which to build new space, which creates high barriers to entry. CBRE points out that the county registered more than 495,000 square feet of negative net absorption in the fourth quarter and 2.8 million square feet negative for the year.

The Airport Area was the only submarket to post positive net absorption, with 15,841 square feet, according to CBRE. The report observes, “Although gross activity reached nearly two million square feet this quarter, it was not enough to combat the slowing demand and the amount of space beingvacated by tenants.”

The average asking triple net lease rate of 72 cents per square foot per month in the fourth quarter dipped by 6.49% when compared to a year ago and four cents lower than last quarter, according to the Voit report. It expects that asking lease rates will remain at current levels for the short run, and concessions should continue to increase in the forms of free rent and increasing tenant improvement allowances. CBRE figures average asking lease rates at 73 cents, down from 75 cents per square foot in the third quarter.

On the investment sales side of the market, Voit notes “expensive and scarce financing, economic uncertainty and volatility, and an increasing gap between ask and bid pricing between buyers and sellers. Buyers are typically offering 25% below asking price, it says. It foresees that the increase of vacancy and available space coupled with slowing demand will continue to put downward pressure on lease and sale rates throughout the rest of this year.

The average asking selling price slipped to $160.37 per square foot in the fourth quarter, down from $164.28 in the third quarter and $174.18 a year ago, according to Voit. CBRE figures show an asking price of $166.32 per square foot.

Voit recorded a decrease in overall sales and leasing of industrial space in 2008. Its survey shows 12.25 million square feet of activity in 2008, down from 12.84 million square in 2007. How soon the industrial market recovers will depend on when the financial markets correct themselves and “hinges on how bad the recession gets and how quickly credit eases up,” the Voit report concludes.