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Industrial Space in Short Supply in Orange County

Property: Demand remains strong for rapidly diminishing available space.

April 07, 1998|MELINDA FULMER | SPECIAL TO THE TIMES

Developers are running out of land zoned for industrial use in Orange County, which may force some businesses to move to the Inland Empire and elsewhere as early as next year, according to a real estate study released Monday.

For the moment, the market is flooded with new industrial projects as developers rush to meet demands of the county's surging economy, said CB Commercial Real Estate Group. Zealous builders are constructing almost 30% more space than they did last year, but researchers expect that space to be absorbed by early 1999.

"Demand is not slacking off," said Sheri Cameron, CB Commercial's regional research director.

Developers anticipating this growth spurt have dumped 4.1 million square feet of new industrial space on the market this year, primarily in south Orange County.

Vacancy rates in this popular area have nearly doubled in the last year to 17% as new buildings have been completed. These new buildings have boosted the county's overall vacancy to 7.85% in the first quarter, up slightly from 7.3% at the end of last year.

"Developers have saturated the market," said Chris Bates, a broker in CB Commercial's Laguna Hills office, noting that in one five-mile radius, more than 400 acres have been sold for new industrial developments. That area, which stretches from the community of Foothill Ranch on the north to Lake Forest on the south, is now virtually sold out, Bates said.

This influx of new commercial development is creating an even bigger demand for new housing and driving up residential lot prices, says Placentia-based real estate consultant Alfred Gobar. And, it should mean higher sales and lease prices for most industrial space users later this year, brokers say.

Already, lease rates for manufacturing and warehouse space have jumped 16% to 58 cents per square foot at the end of the first quarter from 50 cents the same time last year. Likewise, the average sales price for manufacturing and warehouse space has jumped 8% to $67.88 per square foot, as the market has heated up.

Feeling the squeeze, some firms that moved to the south part of the county during the real estate slump have begun pushing north and east. Brokers expect a bigger migration if rents go up another 12% this year as expected.

"When we had this kind of pressure in the late 1980s, industrial development in Chino and Corona boomed," Gobar said.

Smaller multi-tenant industrial parks also are expected to thrive as the region's office market heats up. Small businesses that moved into office space five years ago when prices were low are now being forced to move back to less-glamorous space to stay within their budget, Gobar said.

Office rents are surging because of the scarcity of space. Countywide, the amount of available office space has dropped 21% in the last year to 9.41%, its lowest level since the early 1980s, according to CB Commercial.

That shortage of space has put intense pressure on rents. Countywide, landlords were asking--and getting--an average of $1.81 per square foot per month for office space at the end of the first quarter, an 18% increase from last year.

The tightest and, therefore, most expensive markets are south county and the John Wayne Airport area. South Orange County, which represents 9% of the county's office supply, has a vacancy rate of just 3.72%, half of what it was at the same time a year ago. Rents in that area have risen nearly 27% to $2.18 per square foot from the same time last year.

Sizable rent increases like these have created a wide price gap between north and south. At only $1.40, rents in north Orange County are 36% less than at similar buildings in south Orange County and the airport area.

"Tenants who are coming into the market for the first time are saying that [the north county market] is a much better deal," Cameron said.

For those who prefer to be in the posh business parks of south Orange County and the airport area, 10 new office buildings of about 700,000 total square feet are under construction from Brea to Aliso Viejo. And another 40 are in the development pipeline, researchers say. Whether all of these projects will get off the ground depends on how long the economic rebound lasts.

Office demand seems to be holding in spite of a few big corporate hits, like the loss of Unocal Corp. to Phoenix. This year, 10,400 new office jobs are expected to be added in the county, prompting the need for another 1.8 million square feet of office space--about the same as last year.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Orange County's Industrial Bloom

Three years into a recovery and Orange County's industrial market is peaking, analysts say. A flury of new construction has pushed the overall vacancy rate up to 7.8% in the first quarter, from 7.3% last year. It is expected to go even higher, researchers say, until the the of development slows next year.

Industrial Availability

*

Industrial Construction

Completed space, in millions of square feet

Under construction in first quarter 1998

Source: CB Commercial Real Estate Group Inc.

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