The Orange County industrial market, along with the rest of Southern California, continues to experience unprecedented demand driven by a number of factors which have positively impacted the market.
Most notably, the pandemic has accelerated the consumer shift to e-commerce and bolstered the demand for warehouse space. Manufacturing companies are aggressively increasing production capacity in order to build inventories and mitigate supply chain disruption, creating demand for additional space.
The strong housing and construction sectors have also added to the competition for space to store building material.
In combination these components have created an insatiable appetite for industrial product, driving county-wide vacancy rates to a historic low of 1.35% and generating record sale pricing and lease rates, with each new transaction eclipsing the last. Across the county over the past 12 months, industrial asking lease rates have increased by 14.5% and asking sale prices have increased by 20.2%.
Institutional investment activity in the county is still incredibly strong with intense bidding for limited investment offerings. A byproduct of this demand in a supply-constrained market is a rapid spike in land values, and sales prices are now approaching $150 per square foot, nearly double the land prices from just two years ago. In spite of escalating land and construction costs, the economics of new development have been supported by the rapid appreciation in lease rates and aggressive assumptions about continued rent growth. Infill development sites are in such high demand that industrial developers are acquiring existing corporate campuses and office complexes intending to redevelop these sites into state-of-the-art warehouse facilities. Rexford Industrial, Black Creek Group, Duke Realty and Western Realco, among others, have all been successful in recent infill land acquisitions.
While attempting to meet the unprecedented demand, the supply side of the industrial market faces potential headwinds as labor shortages and the supply chain crisis impact both construction costs and lead times for new development.
However, these same cost factors also impact the industrial user which could result in diminished demand. For example, the Producer Price Index increased by 9.65% in November of this year, the highest level in the past ten years. Inflation now presents one of the most significant threats to the overall economy and ultimately the demand for industrial space.
The Consumer Price Index has already increased by 6.8% since November 2020 and as the costs of necessities and energy continue to escalate, the discretionary spending ability of the consumer will be impaired, which will eventually impact the demand for warehouse space. Despite these concerns and the surge in Covid cases, the Orange County industrial market should continue to see low vacancy and increasing lease rates and sale prices through 2022 as lack of inventory will continue to present the biggest challenge to the end-user of industrial real estate.