It’s no secret that industrial assets have been highly sought after in the commercial real estate industry, and Orange County’s industrial market is no different. In the third quarter of 2021, the region continued to see low vacancy in industrial space and even higher demand. However, a third quarter market report from CBRE shows that these heightened levels of demand could cause potential challenges as developers race to put out more product over the next several years.
“We’re really dealing mostly with a supply issue. Activity levels will be great, the question is, will we start to see multi-story product eventually, which would help alleviate some of our supply constraints,” said Kurt Strasmann, executive managing director at CBRE’s Newport Beach office.
With increased leasing activity and a lack of supply, vacancy rates in Orange County’s industrial market decreased by 60 basis points year-over-year to 1.4 percent. The availability rate also dropped to 2.5 percent in the third quarter of 2021, with more renewals to take place over the next quarter due to an increasing lack of space.
With lowering vacancies, prices soared in the region. The overall asking lease rates shot up to $1.30 per square foot. This was a 26.2 percent increase from the third quarter of 2020, and a 15 percent increase from the previous quarter.
“The major result is very significant lease appreciation, which is terrific for owners but challenging for occupiers,” Strasmann said.
The report showed that the largest volume of leasing activity occurred in Orange County’s Greater Airport Area as well as North Orange County. In the Greater Airport Area submarket, vacancy was slightly higher than average at 1.5 percent. However, the submarket also saw the highest spike in leasing rates, where they reached $1.43 per square foot, or roughly a 24.3 percent increase from the second quarter of the year.
North Orange County, however, recorded the lowest vacancy rate at 0.9 percent. According to the report, only five buildings over 50,000 square feet remained available by the end of the third quarter in North Orange County.
Both submarkets saw large scale leases signed over the course of the third quarter. In North Orange County, both Houdini Inc. and FedEx signed leases for 399,437 and 161,460 square feet, respectively. In the Greater Airport Area, Cloud Mountain Inc. signed a lease totaling 246,622 square feet, and Syco Enterprises signed a lease for 134,716 square feet.
“Ground-up development is almost non-existent, and redevelopments are few and far between, which creates a huge challenge for occupiers to find available state-of-the-art industrial space. Rents for large quality buildings are escalating faster than anyone ever imagined, which creates challenges for occupiers,” Strassman said.
Despite the lack of space, developers are continuing to deliver industrial product wherever possible. Currently, there is nearly 2.3 million square feet of industrial product in some stage of development throughout Orange County, with North Orange County accounting for two million square feet of the total pipeline. Approximately 1.5 million square feet of the total two million comes from Goodman Logistics’ four building industrial campus in Fullerton. An additional one million square feet is expected to break ground in Aliso Viejo and Huntington Beach.
Overall, the demand for space in Orange County’s industrial market is not anticipated to go away anytime soon. As tenants continue to fight for space in the region, CBRE also predicts that Orange County will see more industrial lease renewal activity while developers strive to push out more product. This will also be a challenge moving forward as land constraints in Orange County only get tighter.
“Building rents, building sales and land will all continue to appreciate at record rates in 2022. All fundamentals in the sector are very strong, and we foresee that to continue into 2022 and beyond,” Strasmann said.