After several years of unprecedented demand, Orange County’s industrial real estate market is experiencing a marked slowdown. The surge in warehouse space fueled by pandemic-era e-commerce growth is easing, leading to greater availability and changing the dynamics for landlords, tenants, and investors alike, according to a recent Orange County Q1 2024 Industrial Market Outlook by NAI Capital.
Vacant and sublease space is accumulating rapidly. In the first quarter of 2024, as much as 1.2 million square feet of vacant sublease space hit the market – a 227 percent increase year-over-year and surpassing levels seen during the Great Recession. In real numbers, the overall vacancy rate is up to 3.8 percent. This shift comes alongside a 28.3 percent decrease in leasing activity compared to the previous quarter.
Over the past five quarters, the industrial market has seen the addition of 5.1 million square feet of vacant space, accompanied by 3.2 million square feet of completed construction, the report stated.
The market is rebalancing. For the past couple of years, NAI Capital’s report finds that it has been difficult for tenants to find suitable space. Now, the power is shifting, and landlords with vacant or soon-to-be-vacant space will likely have to get creative.
While average asking rents dipped slightly from their recent highs, they remain significantly elevated from a year ago, now sitting at $1.72 per square foot triple-net. This, combined with rising interest rates, is tempering sales activity. However, demand for large, modern distribution warehouses remains strong, particularly from e-commerce and logistics companies looking to optimize their Southern California operations. Construction continues, although developers are increasingly finding themselves building without committed tenants – a departure from recent trends.
Quality assets in key locations seem to command a premium. However, buyers are also taking a more cautious approach even with capital waiting to be deployed.
For tenants, the current market offers broader choices and more negotiating leverage. Companies exploring expansions or relocations may find better terms and incentives. The surge in sublease space presents flexible options for those seeking short-term or project-based warehousing.
Landlords and investors, on the other hand, face a more challenging environment, NAI concludes. Proactive lease management and an openness to subleasing are becoming essential to maintaining full occupancy. Those holding higher-priced assets might see longer sales cycles or adjust expectations on value until the market stabilizes further.
Overall, Orange County’s industrial landscape is adapting. While the frenzy of the past few years is subsiding, NAI Capital sees the long-term outlook as positive thanks to the county’s strong business climate and strategic position as a logistics hub.
| Orange County Industrial Market Q1 2024 Statistics |
 Source: NAI Capital |
