While there has been no significant change in Orange County and Mid-Counties Industrial metrics since last quarter, a look at these markets from a higher altitude is revealing.
Gross absorption, which measures total move-ins, has been falling little by little over the past few years. Year-to-date gross absorption back in 2015 for Orange County was 9.9 million square feet compared to just 7.5 million square feet through the first three quarters of 2019. Mid-Counties gross absorption fell from 6.4 million square feet to 4.6 million square feet in the same period.
Put another way, the velocity of the market is slowing down. That may seem counter-intuitive given the continued growth in the economy. So, why would lease and sale activity slow down when businesses are still expanding? The biggest reason is lack of supply. There just isn’t enough quality space coming onto the market to meet demand, and this is forcing businesses owners to make do with what they have.
More of them are simply renewing in place even if their current locations don’t meet their needs for growth. Moving costs and disruptions to productivity can be significant and in many cases alternative building are functionally obsolete. Add today’s record high lease rates and sales prices to the equation and it’s easier to see why so many frustrated business owners settle for what they have.
While top quality, functional space still leases or sells in short order, time-on-market for lesser quality buildings is increasing. Tenants and buyers are less inclined to pay today’s premium prices for inferior space, and they are showing more of a willingness to wait for the right opportunity. This may explain the fact that vacancy has drifted up, albeit slightly.
Going forward, we expect transaction velocity to slow further, especially as we draw closer to the general election in November 2020. Historically, more cautious business owners tend to wait until the economic impact of our national elections become apparent. Given the stark differences between the current administration and all challengers for President, we expect a wait-and-see attitude to prevail.