Manufacturing and Warehouse Market Poised for More Gains

Orange County Business Journal, Sep 20-Sep 26, 2004 by Knudson, Barry

Orange County's manufacturing and warehouse market continued to show signs of improvement and posted impressive numbers in the second quarter, despite California's challenging economic climate.

A slight increase in manufacturing and warehouse jobs in the past quarter has spurred renewed confidence in the sector. Gross activity for the quarter increased by 553,505 square feet to 3.8 million square feet, versus the first quarter.

The activity has affected the demand for existing manufacturing and warehouse space and continued to bring down vacancy rates in the sector since last quarter. Vacancy was 4.9% in the second quarter, down slightly from 5.2% in the prior period.

Due to limited sites and increasing land costs, construction has begun to taper and mainly is fueled by the repositioning of existing land.

The county posted positive absorption of 617,022 square feet compared to negative absorption of 708,175 square feet last quarter. Absorption was a negative 451,227 square feet in the second quarter a year ago.

With only 611,282 square feet of construction expected by the end of the year, and with the expectation that manufacturing employment will grow, the demand for space is expected to strengthen.

This will drive landlords to be less flexible on their asking rents and concessions given to new tenants-clearly illustrated by the asking rents for manufacturing and warehouse space.

The average asking lease rate for OC's manufacturing and warehouse space was 56 cents per square foot, up two cents per square foot from the first quarter and three cents versus a year earlier.

In the past three months, the strongest performing segment of the market continued to be small manufacturing and warehouse buildings (30,000 square feet and smaller). In the second quarter, 74% of all buildings absorbed in OC fell into this category, compared to 65% in the first quarter.

With interest rates remaining relatively low, a lot of the activity has been in the small manufacturing and warehouse building sale market. Sale prices for buildings smaller than 30,000 square feet have continued to climb.

South County has led the charge, with buildings trading hands at an average of $135.93 per square foot. The John Wayne Airport area is a close second at $131.07 per square foot.

Sales of North and West County buildings smaller than 30,000 square feet remained strong as well, posting averages just above $102 per square foot.

With a continued shortage of sellers, low vacancy and interest rates, it looks like this segment of the market will continue to be very strong during the next few quarters.

OC's manufacturing and warehouse sector is seeing one of its strongest rebounds since mid-2002 and seems to have enough momentum to remain strong for at least the next six months.

Knudson is a senior associate in CB Richard Ellis Inc. 's Southern California Manufacturing Facilities Group.