ANAHEIM, CA-Orange County's industrial market continued to improve in the fourth quarter of 2012. A sharp increase in both buyer and tenant demand overshadowed the pessimism associated with looming tax increases and federal spending cuts.
While headwinds still exist in both the local and global economies, real estate fundamentals for Orange County have certainly improved. The vacancy rate for Orange County is among the lowest in the nation at 4.68%. Lease rates are up to$.57/SF NNN on an asking basis and sale prices rose an average of 12% since the end of 2011 to $149 per square foot. There continues to be a lack of quality supply across all size ranges, particularly in the 30,000-square-foot to 100,000-square-foot range, resulting in a substantial decrease in transaction volume and more “off market” deals being made. Leasing and sale volume were down by 16% and 19% respectively as compared to 2011 levels, yet net absorption was still positive (approximately 1 million square feet for Q4, 2012).
An improving housing market, marked by recent price appreciation and a sharp decline in the inventory of unsold homes, seems to be improving consumer confidence and boosting net worth. Interest rates are still near historic lows and SBA loans, requiring a modest 10% down payment from the borrower, are the preferred vehicle for small business owners to finance real estate purchases for their own use. Local industrial experts Seth Davenport and Mitch Zehner of Voit Real Estate Services suggest that: “We are at point in the market where the after tax cost of ownership compares favorably to leasing and small businesses are taking advantage of that.”
Increased affordability for buyers coupled with seller motivation to dispose of their real estate by the end of 2012 to avoid an increase in capital gains taxes resulted in a very active fourth quarter for industrial sales throughout the county. There four sales above 100,000 square feet recorded in Q4, 2012, two being purchased by local manufacturers.
We are cautiously optimistic about growth in the manufacturing sector in 2013 as many local firms have recently invested in expanding their footprint locally as opposed to abroad. Tightening margins on labor, lengthier turnarounds and fear of patent infringement overseas are commonly cited reasons for keeping many of Orange County's specialty manufacturers on shore. The sharp increase in activity and demand among larger users has fueled spec development on larger industrial properties for the first time on over a decade. Select projects planned or underway on infill parcels are already experiencing early success.
Panattoni's Anaheim Concourse, a multi-phased, high image, industrial development on the former Boeing campus in North East Anaheim (Miller Street and La Palma Ave.), is close to breaking ground on eight buildings totaling more than 900,000 square feet ranging in size from 50,000-163,000 square feet. Early interest has been strong and they rumored to have a large build to suit on contiguous land under contract to help seed the project. Similarly, Western Realco is underway on two new projects, an 83,450-square-foot industrial building in Brea on the SW corner of Orbiter and Saturn (walls tilted) and a 209,374 class A distribution facility at 2201 E. Cerritos Ave just north of the Anaheim stadium.
As we look forward to 2013, one of our biggest challenges as real estate service providers will be how to accurately communicate this rapidly changing market to our clients. Buyers are not well served to base their buying decisions on dated sale comps (2010-11) for older buildings. Differentiating between various size ranges, the age and quality of the assets is critical in an environment where multiple offers are being made on the limited number of available buildings.
Although the market needs real job growth in 2013 to continue to thrive, buyer demand and the consistent flow of capital into the local industrial market should keep Orange County healthy through 2013.
Ian Britton is managing director of Voit Real Estate Services' Anaheim Office. The views expressed in this column are the author's own.
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