The Orange County industrial market continues to suffer from the effects of the national recession — widespread job losses, corporate downsizing, a lack of liquidity and an overall resetting of property values.
Local businesses are postponing capital expenditures, reducing workforces and attempting to shed excess space, which has caused the availability rate for industrial product to increase by 70 percent since the first quarter of last year. North Orange County has experienced seven consecutive quarters of negative net absorption. The vacancy rate is just shy of 6 percent, while the availability rate is approaching 11 percent.
The sharp increase in availability, coupled with an overall lack of demand, has created a tenant’s market where landlords are forced to be creative and are offering substantial rate reductions, free rent and moving allowances to entice tenants. Despite the aggressive attempts by landlords to lure tenants to their vacant buildings, many tenants do not have the confidence in their businesses to justify a large-scale move and are working with their existing landlords to complete short-term renewals. Although asking lease rates haven’t moved much given the lack of velocity and tenant demand, recently completed deals show that lease rates are down 25 to 30 percent from their 2007 peak.
As available capital has dried up, both investment and user sales have slowed considerably. Property values are down an average of 25 to 35 percent from their 2007 peak. Many of the recently completed small building projects — including The Reserve Brea, the Valencia Business Center in Fullerton and The Citrus in La Habra — have recently reduced pricing by as much as 30 percent in an attempt to pull a limited pool of buyers off the sidelines.
The lagging effect of job losses will continue to negatively impact lease rates, and vacancy rates should rise through the balance of the year. Our industry may not experience the full impact of these losses for another 18 to 24 months as many distressed assets have yet to enter the mix. Owners will need to get creative with both tenants and buyers in order for overall activity to improve. Lease/option transactions, installment sales and short-term leases are going to become more prevalent as Orange County’s industrial sector works toward recovery.
— Ian Britton is a first vice president in CB Richard Ellis’ Anaheim, California, office.