— By Zach Middleton, senior associate, The Klabin Company/ CORFAC International —
Last year brought significant change to the industrial sector across the country. Orange County was not immune to general market factors that were influenced by a sharp rise in interest rates, growing vacancy rates, shallowing tenant demand and increased supply. Fortunately, Orange County remains resilient heading into 2024 due to its prominent geography harbored by major distribution routes along the 5 and 91 freeways, as well as the county’s proximity to the ports.
Orange County also proudly showcases one of Southern California’s most diverse tenant pools. This is spearheaded by key sectors like technology and innovation, research, healthcare and biotechnology, manufacturing and aerospace, consumer goods, ecommerce, wholesale and distribution, underscoring its economic versatility and potential for sustained growth.
Market breakdown: vacancy rate uptick still below historical average
Current vacancy rates across Orange County are as follows:
• North County – 2.4%
• West County – 4%
• South County – 3.5%
• Airport – 2.5%
Vacancy rates have trended upward but remain below the historical average of 4 percent. A growing number of cheaper sublease options and the slight uptick in vacancy rates have influenced direct deal rates as landlords need to compete for tenants who have more options.
Asking Rates Cool Off
An increase in asking rates tempered in 2023. This was after a multi-year surge in rates that was influenced by the accelerated adoption of ecommerce thanks to the pandemic. Orange County average asking rates are currently at $1.75 per square foot (net).
A trend we are monitoring closely is the increase in operating expenses that are materially affecting all-in pricing. While most of those costs are levied by high taxes based on record sales numbers, California’s tumultuous insurance market has brought a new wave of challenges as most tenants and landlords have seen their insurance costs double and triple.
Maintenance costs and management fees have also followed suit. Many tenants are faced with operating costs that can be upward of 20 percent of their total all-in costs. In a market where rates are stabilizing and vacancies have increased, longstanding owners have found themselves with a competitive advantage.
Strong Development Pipeline
Orange County continues to be a major target for large institutional investors. This year kicked off with a purchase by Tishman Speyer and Mitsui Fudosan, which jointly acquired a 32-acre, fully entitled development site on Bake Parkway off the 5 freeway in Irvine for nearly $146 million, or $105 per square foot on the land. Plans are currently in place to develop roughly 600,000 square feet of functional and flexible Class A distribution and manufacturing buildings ranging from 73,000 square feet to 203,000 square feet.
Notable deals setting comps
Here are a few of the deals that are moving the market:
• Raymond West Intralogistics expanded its Southern California footprint into a 215,000-square-foot building. Owned by Warland Investments Company, the space is located at 5560 Katella Ave. in Cypress. The 10-year lease is valued at more than $53 million.
• Little Buddy Toys signed a new lease at 270 E. Palais Road in Anaheim for a brand-new, 95,000-square-foot, Class A development. The seven-year lease is valued at $16.9 million.
• Home & Body Company renewed its lease at 5800 Skylab Road in Huntington Beach, a high-image, 167,778-square-foot distribution facility. The five-year lease is valued at more than $18.6 million.
• Flexfit pre-leased a new 124,678-square-foot Transwestern development in Brea. The 7.5-year lease is valued at more than $24 million.
Orange County was the most stable industrial submarket on the West Coast in 2023, and will remain a target for investors and users in 2024. As the market begins to stabilize on the back end of a rocky 2023, it will continue to attract national and regional investment attention due to its proven resiliency, dynamic tenant pool and premier geography.