By Garrett McClelland, Vice President, JLL
With a global pandemic still in flux, strong demand for Orange County industrial remained constant throughout 2021. As we start the New Year, signs of a slowdown are nowhere in sight.
Orange County’s overall vacancy was at 2 percent last quarter, which ranks among the lowest nationally. Demand continues to outpace supply — with limited inventory bringing the vacancy rate down and driving rents to historic highs. With very few viable options, tenants are forced to settle for anything that will satisfy their needs, or renew. Given this, developers have gotten creative to find solutions and build new industrial product in primary submarkets.
The primary target for industrial developers in Orange County has been Class B and C office buildings located on industrial-zoned parcels. For example, Duke Realty recently bought a primarily vacant 100,000-plus-square-foot office building in Brea. The building is situated on 5.8 acres and is planned for a new modern warehouse industrial facility. According to JLL Research, out of the 12 conversion projects announced last year, nine were office to industrial.
Garrett McClelland, Vice President, JLL
This shouldn’t come as a surprise as we’ve seen rapid rent growth in the industrial sector over the past 24 months. This has made office-to-industrial conversion a viable investment — so much so that the development pipeline doubled quarter over quarter late last year. This increase in construction activity also drove land prices to an all-time high, as of this writing.
Last year ended with new records in yearly absorption even with Orange County’s low supply. Move-ins outpaced deliveries 5:1, according to JLL’s recent research findings. The more than 2.5-million-square-foot, year-to-date net absorption last year was driven largely by ecommerce and logistics companies. These growing corporations scoured the market for available space. The increase of local biotech and apparel companies in need of additional space also contributed significantly to the historically high and positive absorption.
Orange County is primarily a small building market, with very few large warehouse-distribution buildings over 200,000 square feet in existence. And small- to mid-size buyer activity is among the strongest segments we have seen coming out of the pandemic. The Small Business Administration’s incentive programs, coupled with relatively low interest rates, are providing fertile ground for owner-users to target purchase opportunities. As a result, industrial assets in the region are trading around 30 percent higher on a price-per-square-foot basis than the previous year.
Now, a month into 2022 — and the pandemic still in flux — the Orange County industrial market shows no signs of faltering. Recent construction data suggests that some of the much-needed new inventory will be available in the coming months and continue into the foreseeable future. However, tenants still need to plan far ahead of their lease expirations and expect to see rates higher than ever before. Buyer competition for properties and viable land is expected to remain fierce, and no crystal ball can predict the heights we will reach.