We began 2024 with high hopes of lower interest rates and increased economic activity. But the first quarter of the year has challenged these aspirations and revived the thoughts and feelings from late 2023. Rent stability is evident in Orange County’s industrial market, however, with average asking lease rates remaining virtually unchanged quarter to quarter. Landlords and tenants alike are taking notice of the reality of increasing vacancy, resulting in landlords granting concessions of free rent and tenant improvement allowances.
Orange County has continued to add supply in the 50,000 to 200,000 square foot range, bringing heavy competition among landlords and revealing the waning demand in this size range. Landlords are being forced to get creative when it comes to marketing and lease structure as tenants have almost three times as many options to choose from as availability closes in on 5%. Operating expenses are beginning to play a pivotal role in the decision-making process for tenants as the county average moves closer to $0.20–0.25 per square foot. Landlords who have held onto their properties through the last bull run are being rewarded with lower operating expenses to offer the prospective tenant pool.
Functionally obsolete buildings have taken, and will continue to take, the biggest hit when vacancy approaches today’s levels, with very few tenants willing to sacrifice their wants and needs for a reduced lease rate they can get elsewhere. Landlords, completely aware of this, have continued to hold firm on their asking lease rates in most cases and are only making reductions when tenant activity has completely dissipated. Concessions are becoming much more common in this area of the market.
Many planned buildings have completed construction in Q1 which will affect this quarter’s vacancy and availability numbers accordingly. Most of these projects stand between 50,000 and 150,000 square feet. Vacancy and availability will seem to have increased on paper, but the market remains tight below 50,000 square feet in Orange County. Time on market steadily climbed throughout 2023, and as vacancy continues its upward trend towards 5%.
Coming into 2024 many were ready to hit their optimistic red buttons to send interest rates falling. But as we round out Q1 of 2024, cautious optimism is at the forefront of decision-making for the second year in a row. Feel free to reach out to our team with any questions regarding the market report or for any additional insight on the Orange County market.
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