By Dan Vittone, Principal, Avison Young in Irvine

It should come as no surprise at this point that Orange County is on course with a robust economic recovery. Furthermore, there are favorable indicators for a steady increase in value over the next few years. Even though industrial product is limited in the county, development is picking up now that vacancy rates have been on a downward slope and rental rates continue their course on a gradual upturn. While all sectors in Orange County are seeing movement in a desirable direction, quality industrial space is becoming even more of a premium.

The larger industrial spaces are drying up in Orange County. Most of the industrial spaces available today are smaller than 20,000 square feet. Meanwhile, many older buildings are being converted or remodeled to invite a variety of other property uses like residential, creative office and self-storage.

The average asking price for investment-grade industrial properties of more than 20,000 square feet in Orange County is at $147 per square foot, as of the halfway point through the second quarter of 2014. This number has been on the rise year-over-year since the drop at the end of 2010 when the average asking price dipped to $120 per square foot. The average closing price for the second quarter has so far reached $150 per square foot. This number has been rising each year since the low point in 2010 of $69 per square foot. Peak pricing had reached $176 per square foot in 2008.

Cap rates have seen some jagged movement during the same period, but have been trending slightly down, per the annual averages. Actual rates for the current quarter are about 5.8 percent, down slightly from the 6 percent seen at the end of the first quarter of 2014. The cap rates are down from a recent high in early 2012 of 7.65 percent. Cap rates are expected to see some swings on a quarter-over-quarter perspective, though they should continue to trend slightly downward as prices continue to rise.

The overall economic indicators for Orange County are similar to the figures of the first quarter. Mid-way through the year, the market is on track to continue its year-over-year improvement. Industrial vacancy rates currently hover at 4.1 percent. The first quarter of the year vacancy rates had landed at 3.9 percent. Both quarters are still lower than all previous quarters going back to 2008. Since that time we’ve seen a consistent decline. Rental rates are still holding at the $0.69 net, exactly where rates had risen through the first quarter of this year. Prior to the end of the second quarter, the total net absorption rates have dipped slightly to a negative 79,346 square feet for investment-grade industrial properties.

There is finally a substantial amount of industrial construction that has broken ground in the past few months. There will be 11 properties under construction as of the end of the second quarter, which will put more than a million square feet of new inventory on the market. Many of the current development plans have been poised for commencement for more than a year. Most of the properties are reportedly speculative and on the market for sale and/or lease at this point in time. The development at Anaheim Concourse, an 80-plus acre industrial project totaling more than 1.6 million square feet, is leading the way with this new construction. There is still at least 1.6 million square feet of proposed inventory awaiting commencement around the rest of Orange County.