It’s February—which means last year’s numbers are in, and it’s time for a 2021 review, specifically a review of the Orange County commercial real estate (CRE) industry. (For those who don’t know, Voit Real Estate Services has offices in Carlsbad, Irvine, Inland Empire, Anaheim, Los Angeles, and San Diego).
This past year the CRE industry experienced a lot of curveballs and challenges. Our team, however, made the best of it.
Here’s a high-level overview of what happened.
If you’ve been paying any attention to the CRE market this year, you’ll know we’ve been talking about industrial property a lot. In short, industrial was booming!
Although e-commerce drove activity early in the pandemic crisis, users across the entire industrial spectrum are now experiencing healthy growth. As written in our 2021 Q3 Market Report on Orange County Industrial, “demand remained intense, supply shrank, vacancy fell, and prices moved sharply higher.”
It’s also important to note the increased demand for warehouse and e-commerce space since the start of the pandemic. The surge for these spaces continues today, demand is still off the charts throughout the region.
Speaking of high demand, this leads us to our next point: Buyers are struggling more than sellers right now.
Demand for Space
In 2021, the biggest problem for Orange County business owners was the lack of supply of quality industrial space. The existing base of inventory stretched to meet demand while construction activity remained light.
As mentioned in one of our OC broker team’s 2021 review, vacancy rates fell to under 2% throughout the Southland, which has made it almost impossible to find good quality space. For those who are interested, read more about how America’s warehouses are running out of space on our blog.
Owner-user sale prices have also risen sharply, as business owners look to control occupancy costs with fixed-rate loans. As opposed to long-term leasing and suffering annual increases, by purchasing, business owners still invest at a high price but they eliminate higher occupancy costs in the future. Those who cannot buy have little choice but to pay more for space.
This brings us to inflation, which is now running at the highest level in 40 years with little sign of letting up anytime soon.
What little space is available comes at a hefty price tag.
As we’ve reported, even another surge in the virus didn’t slow industrial activity down. Active requirements for lease and owner-user purchase opportunities moved higher, sending lease rates and sales prices to record highs.
As a result of the high competition for quality CRE, landlords have the upper hand in lease negotiations, so it is common for final lease rates to be well above asking.
In fact, the average asking lease rate for Orange County added another $0.02 to $1.14 in 3Q of 2021, breaking yet another record.
Research and Development
As for the research and development sector, net absorption declined but remained in positive territory. Vacancy fell modestly.
Research and Development space typically attracts industries with high employee density, which made the pandemic lockdown rules more difficult to work through than traditional industrial space.
This considered, average asking rents were slightly lower and construction of new R&D space remained low.
Now, let’s talk about office space in 2021, the sector that has changed the most throughout the past two years.
Office space accommodates a higher employee density threshold than its industrial counterpart. Since the first pandemic lockdown, the sector has experienced:
- Consistent negative net absorption
- Falling lease rates
- Rising vacancy
With the rapid spread of COVID’s Omicron variant, there is still widespread reluctance among office users to make leasing decisions. Additionally, many are unsure of what they actually need in terms of space size, configuration, and building class.
The remote-work model has stuck positively for many companies resulting in many considering downsizing. Others are playing a wait-and-see game as they evaluate their options.
A Final Word
As always, we will continue to watch the market closely for you, and keep you updated as we progress through 2022. Read on to view some of our current and latest market reports.