Orange County is one of the most desirable industrial markets in Southern California, with a diverse mix of tenants ranging from manufacturing, distribution, e-commerce, biotech, and aerospace. The demand for industrial space in Orange County has been strong for several years, driven by the robust economy, population growth, and limited supply. However, as the economy faces some headwinds and uncertainty in 2023, how will the industrial leasing market perform?
The Orange County industrial market maintained strong fundamentals despite the tightening economy in Q1 2023. The vacancy rate increased by 38 basis points to 1.46% (mostly driven by subleasing activity), still well below the historical average of 2.5%. The availability rate, which includes vacant and occupied spaces listed for lease or sale, also increased by 67 basis points to 3.11%, but remained lower than the three-year average of 3.4%. The average asking lease rate rose by 2.4% quarter over quarter to $1.62 per square foot, marking a 29% increase year over year.
The main challenge for industrial tenants in Orange County is finding suitable space that meets their needs and budget. High-quality spaces are scarce, especially in the Airport Area and West County submarkets, where vacancy rates are below 1%. Landlords are taking advantage of the tight market conditions and asking for higher rents and longer lease terms. Some tenants are opting to renew their existing leases rather than relocate to avoid disruption and higher costs. Others are expanding their footprint in neighboring markets like Inland Empire or Los Angeles, where more options and lower rents are available.
However, not all tenants are deterred by the high rents and limited supply in Orange County. Some tenants are willing to pay a premium for being close to their customers, suppliers, and workforce. E-commerce, biotech, and food and beverage sectors are among the most active in leasing activity, as they benefit from the affluent consumer base, skilled labor pool, and innovation ecosystem in Orange County. For example, Amazon leased a 144,000-square-foot building in Irvine Spectrum for its last-mile delivery operations. And Thermo Fisher Scientific leased a 125,000-square-foot building in Tustin for its biotech research and development.
The outlook for the Orange County industrial leasing market remains positive for 2023, as demand is expected to outpace supply and keep vacancy and availability rates low. Construction activity is healthy, with 2 million square feet currently underway, but most of the new projects are build-to-suits or pre-leased by large users. The average asking lease rate is projected to continue to increase by 5% to 10% annually, as landlords capitalize on the favorable market dynamics. We expect this to happen a much slower rate than we have seen in most recent years. Tenants will have to be flexible and creative in finding solutions that fit their operational and financial goals.
If you are looking for industrial space in Orange County or need assistance with your leasing strategy, please contact us at Mitchell-Osterkamp Industrial Group. We are a team of experienced and dedicated professionals who specialize in industrial real estate services in Orange County. We can help you find the best space for your business, negotiate favorable lease terms, and provide market insights and guidance throughout the process. We look forward to hearing from you soon.
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