By Byron Foss, Executive Vice President, JLL

The Orange County industrial market remains one of the tightest markets in the region with 1.7 percent vacancy, 6.6 percent year-over-year rent growth, minimal new development, and owner-users and tenants competing for space.

While the third quarter witnessed negative net absorption of 92,790 square feet, this was primarily due to Royalty Carpet Mills’ going out of business and vacating 752,266 square feet across three buildings in the Airport Area. Both the West and North County submarkets recorded third quarter positive net absorption of 514,498 square feet and 438,972 square feet, respectively.

For the first time since 1999, we are seeing a new ground-up development on Orange County’s Airport Submarket. Since 2011, 3.7 million square feet has been delivered to the market with 86 percent of it developed in North Orange County. In the coming months, Shea Properties will be demolished an existing facility and breaking ground on a 495,000-square-foot, multi-building project at Dyer Road and Tech Center Drive in Santa Ana. Buildings are set to range from 22,000 square feet to 163,000 square feet.

Industrial users are required increasingly higher functionality from their space as the consumer shift to online shopping has expanded opportunities for the e-commerce industry. This has made many older properties obsolete. As demand increases for fast(er) and (more) convenient delivery, it has become more vital for e-commerce and 3PL companies to be situated near consumers. These companies have leased up about 1.7 million square feet of Orange County’s warehouse and distribution space over the past 24 months.

The strong demand for industrial space combined with the lack of available options has not just placed upward pressure on rental rates, but also on sales prices. In many situations, sellers are receiving multiple offers, often causing a bidding war among the potential buyers. Owner occupier demand is outstripping supply five to one across all size segments throughout the market. Investors are now willing to pay more than owner occupiers, which historically has not been the case, adding more pressure to owner occupiers. Investors are confident they can lease properties quickly at historically high rental rates. Average sales prices will remain higher than historical peaks, including a greater number of buildings attracting prices above $200 per square foot.