Orange County’s industrial market has been running hot for over a decade, but buyer demand cooled further in the first quarter due to persistently high prices and the recent spike in mortgage interest rates. The leasing side of the equation is under pressure as well, as increasing economic uncertainty has businesses owners taking a more cautious approach to making long term commitments for more space.
Hopeful sellers, still looking to achieve last year’s peak pricing, are seeing their properties sit on the market for months rather than days or weeks. As a result, there has been an increase in price reductions, especially for older, less functional owner/user buildings. Even the institutional players, still flush with cash, have become more cautious. Those who have not moved to the sidelines altogether are focusing on quality product leased to strong credit tenants.
While leasing demand has fallen off last year’s peak, it is still strong enough to absorb the limited supply of quality space that does come to market. Vacancy is still at an historic low point and there is adequate demand from various user types, including the e-commerce sector, to keep demand from stalling out. Fortunately, Orange County has a central location, good transportation infrastructure and proximity to the Ports of Long Beach and Los Angeles, all of which has helped insulate the region from severe economic challenges in the past.
Talk of recession later this year is on the rise, but the current balance of industrial supply and demand should insulate the market from a wild swing in property values and lease rates in the near term. Orange County’s local economy remains well-balanced in terms of the business sectors driving economic activity, unlike the Silicon Valley economy, which is primarily driven by the struggling tech sector. So, even though we are seeing some uncertainty and hesitation from investors, owner/users and tenants of late, the strong underlying fundamentals of the Orange County economy should help to mitigate a significant falloff in industrial property sales prices and lease rates through the balance of the year.
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