Dillon Dummit, Senior Vice President, Cresa in Newport Beach, Calif.
No one will deny that the Orange County industrial market is tight, boasting a 4.1 percent vacancy. If you are an industrial user looking for 100,000 square feet or more, your options are extremely limited, as supply and demand are not working in your favor in terms of rental rates and landlord concessions. According to CoStar, positive net absorption was just above 900,000 square feet for the second quarter of 2014. Compare that with the 978,000 square feet currently under construction and it is easy to see why most believe these rate and scarcity trends will continue. A number of large warehouse and industrial buildings in Orange County are also being raised and converted to high-density residential or data center space. These facts beg the question, where will all the industrial users go? Two counterbalances have the potential to cool the decreasing vacancy and create disintermediation to the benefit of Orange County industrial users.
As rental rates continue to rise in Orange County, more and more companies are being lured to the Inland Empire where they can still make two port trips a day and consolidate into a much more efficient and affordable building. Companies that grew by necessity in Orange County are finding it hard to ignore the cost savings that the Inland Empire can offer in terms of labor, rental rates and increased cubic square footage of the taller, modern buildings. The successful, post-recession companies are taking a more strategic, long-term planning approach to their real estate as opposed to cobbling space together as needed.
These companies are, more often than not, deciding to migrate east to the Inland Empire, though some are leaving California altogether. This continued migration east is likely to cause some disintermediation to the industrial market in Orange County and potentially free up space.
The likely increase in the minimum wage in California is being followed closely by Orange County executives who have a significant labor base locally and feel that it will have a trickle-up effect on non-minimum-wage employees. If the operation is not strictly port- or third-party logistics related, they can’t help but start to consider a relocation out of state. Others consider bifurcating their operations where the corporate office and research and development are left in Orange County, while the manufacturing-heavy segment moved to a more labor-friendly state. Labor is by far the biggest needle-mover when it comes to reducing operating costs. Companies who go through the process of modeling out-of-state options are frequently surprised by the savings that can be achieved. A partial or full relocation out of state can often garner impactful energy savings, as well as aggressive state and local economic incentive packages that pay for the move and operational ramp-up in its entirety. If minimum wage and labor rates do climb, as anticipated in California, this could act as yet another pressure valve to free up industrial real estate in Orange County.
Orange County is a hard place to beat in terms of quality of life with its diverse, educated labor-base, but there is always a tipping point. As industrial rates continue to climb, options for buildings continue to dwindle and labor costs rise, only those industrial users that absolutely have to be in Orange County will stay.
By Dillon Dummit, Senior Vice President of Cresa in Newport Beach, Calif. This article first appeared in the October 2014 edition of Western Real Estate Business magazine.