Our commentary and downloadable reports on the Mid Counties and Orange County industrial markets.
In a recent post, we discussed the mixed messages the Southern California industrial real estate market has been sending us since late last year when the bull run we have experienced for a decade appeared to top out. What we expected was at least a mild correction as rampant inflation and higher mortgage interest rates impacted investor and business decision-making. What we got, and what we still have, is a bit of mystery.
Orange County is no exception to the current trend line throughout the Southland, as evidenced by the Q2 market report that follows. Sales prices remain at a record high, though there are fewer sales to look to for guidance. We expected to see more property owners sitting on record gains to start cashing in, but it didn’t happen. So, supply is still running at a trickle, as they have stubbornly held on to assets that have risen in value by orders of magnitude. A typical building in Orange County is now worth roughly four times what it was 10 years ago, yet only a handful of owner/users decided that enough was enough in Q2 and decided to sell. Institutional sales have dwindled, as well, as the rise in the cost of their capital is out of sync with today’s price point. Yet, what few sales do take place, trade at record price levels.
The leasing market is another mystery. Vacancy is on the rise, but barely broke the 2% barrier during Q2. A year ago, the vacancy rate stood at just 1.2%. And, even though properties are no taking longer to lease, the average asking rate went up again during Q2, to a new record high of $1.68. Clearly, landlords remain bullish enough to leave their properties empty for a couple more months, confident that they will get their price in the end. So far, that appears to be the case, though we have observed more price reductions, a slight increase in free rent and a willingness to address deferred maintenance issues to offer space on a more turn-key basis. But, the pendulum has not swung to the tenants’ advantage in any significant way, at least to this point. Owners of quality buildings offered for lease still hold most of the cards.
Unless we experience another economic shock or a resurgence in inflation, we see things staying pretty much the same through the end of the year. Transaction velocity may slow a bit and net absorption will hover around the zero line. Sales prices will hold near current levels due to lack of supply and time-on-market for lease product will continue to increase. Effective lease rates could move slightly lower due to an increase in concessions, but asking rates should hold near current levels.
Our big question is: when will we see more owners become sellers, and when we do, what will the impact be on pricing?