O.C. Third Quarter 2016 – Industrial Market

Ken Ward Economy

Orange County’s Vacancy Decreases to 2.4%
Net Absorption Positive 785,928 SF in the Quarter

The Orange County Industrial market ended the third quarter 2016 with a vacancy rate of 2.4%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 785,928 square feet in the third quarter. Vacant sublease space decreased in the quarter, ending the quarter at 398,562 square feet. Rental rates ended the third quarter at $10.24, an increase over the previous quarter. There was 311,766 square feet still under construction at the end of the quarter.

Absorption
Net absorption for the overall Orange County Industrial market was positive 785,928 square feet in the third quarter 2016. That compares to positive 383,935 square feet in the second quarter 2016, positive 39,860 square feet in the first quarter 2016, and positive 738,003 square feet in the fourth quarter 2015.

Tenants moving into large blocks of space in 2016 include: Kuehne + Nagel Inc. moving into 300,000 square feet at Anaheim Concourse Distribution Center, Zodiac Aerospace moving into 280,460 square feet at 5701 Skylab Rd, and Kawasaki Motors Corp USA moving into 203,231 square feet at 26972 Burbank Ave.

The Flex building market recorded net absorption of positive 347,180 square feet in the third quarter 2016, compared to positive 365,654 square feet in the second quarter 2016, negative (215,196) in the first quarter 2016, and positive 168,935 in the fourth quarter 2015.

The Warehouse building market recorded net absorption of positive 438,748 square feet in the third quarter 2016 com- pared to positive 18,281 square feet in the second quarter 2016, positive 255,056 in the first quarter 2016, and positive 569,068 in the fourth quarter 2015.

Vacancy
The Industrial vacancy rate in the Orange County market area decreased to 2.4% at the end of the third quarter 2016. The vacancy rate was 2.6% at the end of the second quarter 2016, 2.6% at the end of the first quarter 2016, and 2.6% at the end of the fourth quarter 2015.

Flex projects reported a vacancy rate of 2.6% at the end of the third quarter 2016, 3.1% at the end of the second quarter 2016, 3.6% at the end of the first quarter 2016, and 3.2% at the end of the fourth quarter 2015.

Warehouse projects reported a vacancy rate of 2.3% at the end of the third quarter 2016, 2.5% at the end of second quarter 2016, 2.3% at the end of the first quarter 2016, and 2.5% at the end of the fourth quarter 2015.

Largest Lease Signings
The largest lease signings occurring in 2016 included: the 441,020-square-foot lease signed by 3PL Global LLC at 601 S Acacia Ave in the North County market; the 319,174-square- foot deal signed by Bunzl Distribution California at Miraloma Distribution Center in the North County market; and the 300,000-square-foot lease signed by Kuehne + Nagel Inc. at Anaheim Concourse Distribution Center in the North County market.

Sublease Vacancy
The amount of vacant sublease space in the Orange County market decreased to 398,562 square feet by the end of the third quarter 2016, from 421,440 square feet at the end of the second quarter 2016. There was 389,303 square feet vacant at the end of the first quarter 2016 and 450,294 square feet at the end of the fourth quarter 2015.

Orange County’s Flex projects reported vacant sublease space of 97,326 square feet at the end of third quarter 2016, down from the 123,012 square feet reported at the end of the second quarter 2016. There were 121,735 square feet of sub- lease space vacant at the end of the first quarter 2016, and 83,053 square feet at the end of the fourth quarter 2015.

Warehouse projects reported increased vacant sublease space from the second quarter 2016 to the third quarter 2016. Sublease vacancy went from 298,428 square feet to 301,236 square feet during that time. There was 267,568 square feet at the end of the first quarter 2016, and 367,241 square feet at the end of the fourth quarter 2015.

Rental Rates
The average quoted asking rental rate for available Industrial space was $10.24 per square foot per year at the end of the third quarter 2016 in the Orange County market area. This represented a 1.1% increase in quoted rental rates from the end of the second quarter 2016, when rents were reported at $10.13 per square foot.

The average quoted rate within the Flex sector was $14.24 per square foot at the end of the third quarter 2016, while Warehouse rates stood at $9.01. At the end of the second quarter 2016, Flex rates were $13.86 per square foot, and Warehouse rates were $8.90.

Deliveries and Construction
During the third quarter 2016, no new space was completed in the Orange County market area. This compares to two buildings totaling 379,294 square feet that were completed in the second quarter 2016, four buildings totaling 216,633 square feet completed in the first quarter 2016, and 508,203 square feet in seven buildings completed in the fourth quarter 2015.

There were 311,766 square feet of Industrial space under construction at the end of the third quarter 2016.

Some of the notable 2016 deliveries include: Imperial Distribution Center, a 367,194-square-foot facility that delivered in second quarter 2016 and is now 34% occupied, and 11488 Slater Ave, a 134,000-square-foot building that delivered in first quarter 2016 and is now 100% occupied.

The largest projects underway at the end of third quarter 2016 were 3300 E Birch St, a 218,648-square-foot building with 0% of its space pre-leased, and 1675 Deere Ave, a 51,450- square-foot facility that is 100% pre-leased.

Inventory
Total Industrial inventory in the Orange County market area amounted to 303,863,538 square feet in 12,589 buildings as of the end of the third quarter 2016. The Flex sector consisted of 69,351,888 square feet in 3,259 projects. The Warehouse sector consisted of 234,511,650 square feet in 9,330 buildings. Within the Industrial market there were 1,760 owner-occupied buildings accounting for 61,999,928 square feet of Industrial space.

Sales Activity
Tallying industrial building sales of 15,000 square feet or larger, Orange County (California) industrial sales figures rose during the second quarter 2016 in terms of dollar volume com- pared to the first quarter of 2016.

In the second quarter, 34 industrial transactions closed with a total volume of $223,349,714. The 34 buildings totaled 1,415,954 square feet and the average price per square foot equated to $157.74 per square foot. That compares to 33 transactions totaling $166,392,150 in the first quarter. The total square footage was 1,067,659 for an average price per square foot of $155.85.

Total year-to-date industrial building sales activity in 2016 is down compared to the previous year. In the first six months of 2016, the market saw 67 industrial sales transactions with a total volume of $389,741,864. The price per square foot has averaged $156.93 this year. In the first six months of 2015, the market posted 84 transactions with a total volume of $568,554,907. The price per square foot averaged $142.08.

Cap rates have been lower in 2016, averaging 5.26%, compared to the first six months of last year when they averaged 5.37%.

One of the largest transactions that has occurred within the 1st four quarters in the Orange County (California) market is the sale of 5701 Skylab Rd in Huntington Beach. This 280,460-square-foot industrial building sold for $36,750,000, or $131.03 per square foot. The property sold on 9/22/2016.