DEMAND EASES, RENT GROWTH SEES SIGNIFICANT SLOWING
2023 Q2 INDUSTRIAL REPORT ORANGE COUNTY Demand for Orange County industrial space eased in the first half, and there was significant slowing of the recent double-digit rent growth, which is up 52% overall since the lockdown.
Countywide net absorption was negative 562,416 SF in the second quarter and was off 995,957 SF in the first half. It was the weakest quarterly demand since early 2019. Although the vacancy rate gained 60 basis points in the second quarter to settle at 2.6%, the rate remains less than a percentage point from the all-time low.
The county’s four submarkets total 275.9 million SF. North County, the largest, posted the most negative net absorption – 726,092 SF for the first half with 335,076 SF in the second quarter. The contraction is due, in part, to a jump of more than 1 million SF of vacant sublease space added to the submarket in the first half.
At the end of Q2 available second-hand space countywide reached its highest point since 2010, totaling 3.64 million SF, or 1.3% of the total inventory.
The Airport was the only submarket to post net growth in each of the last two quarters, totaling 209,400 SF since January. The 72.3-million-SF submarket is the tightest in Orange County with a 1.9% vacancy rate.
There was a sudden spike in rental rates during 2021 and 2022, in which rent growth averaged 14.2%. At the end of the second quarter the average asking lease rate was $1.67 per SF triple net – roughly double the average rate since 2015. Annual rent growth over the previous eight years averaged 4.5%. But with lease rates beginning to slow late last year and up only 3% through the first half of 2023, rent growth lately is reverting to the mean.
Orange County ranks as the nation’s sixth costliest market behind Miami, Fort Lauderdale, San Diego, San Jose and San Francisco, where rents are highest, averaging $2.28 per SF.
The largest lease of the quarter was a 165,171-SF Class A building with 32-feet of clear height on Knott Street in Garden Grove to a start-up electric vehicle maker with rent starting at $1.85 per SF.
The largest sale in the second quarter was the $28,150,000 full-price investor purchase of a 121,225-SF leased-up distribution building in Anaheim from Bixby Land Co. The deal for the 43-year-old building on South Allec Street translates into $232 per SF. A 40-year-old, 117,805-SF R&D building on Michelle Drive in Tustin with a tenant was acquired by local investors for $32 million, or $271.97 per SF. A 102,800-SF showroom building on Anaheim’s State College Boulevard, also known as the mile of tile, was purchased for $37.3 million, or $363,07 per SF, by a group of Dallas, Texas, investors.
Orange County job growth will be flat this year and consumer spending will be up 3% — far less than the annual double-digit spending during the pandemic, said Chapman University’s Jim Doti in his mid-year economic forecast. Cal State Fullerton economist Anil Puri recently predicted a “garden-variety recession.”