Lease rates jumped a record 4.7% in the first quarter and gained 8.8% year over year for the largest quarterly and annual increases since the recession. At the same time, first-quarter demand for space posted its biggest threemonth decline in more than eight years, pushing up the countywide vacancy rate 70 basis points to 3.5%.
Despite otherwise healthy leasing activity, the county’s four major submarkets – Airport, North, South and West – reported 1,645,471 sq. ft. of negative net absorption in the first quarter. Countywide, there have been four straight quarters of negative net absorption. Tenant contraction in six of the last nine quarters totals nearly 4 million sq. ft. since the vacancy rate hit its low point of 2.4% at the end of 2016.
Meanwhile, asking rents were up everywhere. The largest first-quarter gain occurred in the Airport market, where landlords were asking an average of $1.21 per sq. ft. gross. This represents a 10% increase from the prior quarter and 20% from the same period one year ago. Asking rents in the 73.1 million sq. ft. Airport market were up 73% from their low point in 2012. Countywide, asking gross rents were up 82% since the end of 2010.
In spite of easing tenant demand, vacancy rates remain near all-time lows and investors remain bullish, particularly for large Orange County industrial buildings. In the first quarter, Prologis acquired three of Western Realco’s recently completed eight-building, 1 million sq. ft. Beckman Business Center in Fullerton for a reported $124 million. Additionally, Deutsche Wealth & Asset Management purchased a 1.2 million sq. ft. distribution building in Brea from grocery company Albertsons for $160 per sq. ft. Albertsons signed a 15-year lease with annual increases up to 1.75%.
The largest first-quarter absorption declines came in the North and West county markets, which combined to put more than 1.4 million sq. ft. of space back in available inventory.
Although the Airport market posted 60,961 sq. ft. of negative net absorption in the first quarter, tenant contraction in seven of the previous nine quarters totals more than 2.3 million sq. ft.
The North County market – the county’s largest with 117.2 million sq. ft. – posted 872,526 sq. ft. of negative net absorption in Q1. Since the first quarter of 2017, North County’s negative absorption totals 364,456 sq. ft. The 42.8 million sq. ft. West County market reported 554,050 sq. ft. of negative net absorption in the first quarter and 1.06 million sq. ft. of negative absorption since Q1 of 2017.
With 41.5 million sq. ft. of inventory, South County reported 165,874 sq. ft. of Q1 negative demand and was in the red over six quarters since Q1 2017.