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Orange County's industrial marketplace doesn’t quite favor owners just yet, but it’s getting close. Our industrial inventories are at historic lows and, with a few exceptions, we have not seen any new construction since 2007. There are a couple new projects planned — and a few more are under construction — but they’ve mostly been large warehouses north of 100,000 square feet.
The projected asking rents for these big boxes is $0.50 or more per square foot, triple net; a very expensive rent for a commodity. In general, as these big box rents approach or exceed $0.50 triple net, occupants tend to seek cheaper environs. In Orange County’s case, this usually means they migrate east of town in the Inland markets or beyond. Smaller, newer inventory (20,000 square feet to 50,000 square feet) that hits the market these days is gobbled up quickly, sometimes with multiple suitors. Incubator space (less than 10,000 square feet) has also rebounded nicely with absorption at a blistering pace. We haven’t seen a great deal of rent growth or price appreciation to date, although the latest round of transactions that are in escrow now should bring some evidence of upward change.
During the depths of the depression (anyone who calls it a recession did not sell or lease commercial real estate for a living), an occupant could write his own ticket in regards to lease rate, terms, concessions, etc. These market conditions are a mirage in the rearview mirror today. At this stage in the cycle, there is disbelief by the occupants that the market has rebounded as quickly and thoroughly as it has. Occupants should prepare themselves for fewer alternatives and fewer concessions. They should also be in a position to react when the right alternative hits the market. Gone are the days of touring endless buildings, picking the most aggressive owner and making a deal.
Since 2009, interest rates have been at lows not seen since the Eisenhower administration. Occupants in some instances can purchase a location and have the resulting payment be less than that of a rent payment. This is great motivation to own your location if your company is a stable size, has been profitable for the past two years and the daily need for operating capital is not crushing, thereby allowing for a down payment. In my opinion, the days of cheap money are numbered as logic will tell you that if the economy heats up a bit, so will the cost of money.
If you are a tenant and signed a lease after 2008, congratulations! You have benefited from cheap rent for the past five years. You can potentially renew for a slight increase. If your owner is savvy, expect a big rent increase. Should you venture into the market to look at alternatives, be prepared for a shock: there are not many available buildings and owners are less motivated. If you can buy your location, do it! This cheap money won’t last.
If you are a tenant and signed a lease prior to mid-2008, approach your owner now about an extension. Chances are you can save some money on your rent payments. If you are thinking about selling your building and can wait, wait. The prices are increasing and will be better a year from now. If you are thinking about buying a building and your lease arrangement is flexible or expiring, do it now! Be prepared before you survey the market. Hire a competent broker and engage him exclusively. Get yourself pre-qualified for financing. Then, when the right alternative comes along, you’ll be ready.
— Allen Buchanan, principal, Lee & Associates Orange