New construction abounds. Where are the tenants?

A new wave of commercial construction in Orange County leaves me wondering: Where are all the new tenants?

Let’s circle back first to the last big industrial building boom in Orange County, which took place in 2003-06 before the Great Recession.

During that time frame, several sleek new industrial projects dotted the county’s geography from Anaheim south to Irvine Spectrum. Aging manufacturing campuses gave way to Class A developments.

Noteworthy among these during that period were the Johnson Control Campus in Fullerton, Mission Land acreage in Brea, Fender buildings in Fullerton, and some of the Boeing holdings in northeast Anaheim.

Also interesting were the sizes constructed. Typically they were boxes between 10,000 and 50,000 square feet. The land pricing, city influence, capital appetites, construction costs and market demand all coalesced to create some beautiful new inventory.

Our local economy was bustling and owner-occupied financing was readily available. Many of the project’s buildings were gobbled up pre-completion. Housed within them were locally owned manufacturers and logistics providers that took advantage of owning the premises from which they operated.

Generational wealth was created as these addresses continued to appreciate while no new similar-sized stock developed.

Flash forward to the next wave, which began in 2014 and continues today.

The Beckman cluster of buildings in Fullerton gave way to a group of large logistics hubs totaling almost 1 million square feet. National Oilwell Varco shuttered plants in Brea and Orange. Brea now boasts a 108,000-square-foot address while demolition in Orange started this month.

Planned are two new addresses: one is 100,000 square feet and the other 189,000 square feet. Excess land owned by Suzuki in Brea formed the basis of three Class A structures. The former Kimberly Clark manufacturing location in Fullerton was scrapped and replaced by four buildings equaling over 1.6 million square feet.

Tenants such as Bandai, Samsung and Sprouts now call these addresses home. And there are several more in Anaheim, Fullerton, Brea, Irvine and Garden Grove.

Interestingly, despite the significant investment and construction efforts, there seems to be a glaring absence of tenants ready to occupy these remaining newly built spaces.

To understand the conundrum of vacant properties, we must examine the current market dynamics.

The economic and market conditions that fueled the previous industrial boom differ from those we encounter today. Fluctuating land pricing, changing city policies, varying capital availability, rising construction costs and shifting market demands all contribute to the complex equation.

During this boom what’s been notable is the inventory, which averages just over 90,000 square feet. Unlike the Inland Empire where 100,000-square-foot buildings are considered small, locally, our sweet spot is well below this mark.

One notable shift between the previous and the current wave of construction lies in the ownership models. In the past, owner-occupied financing was readily available, enabling local manufacturers and logistics providers to secure their own spaces. However, this time around, we’re seeing a different landscape with a diverse range of investors and owners driving the construction projects.

The motivations and investment strategies of these new players align with the needs of large potential tenants – who are awaiting some certainty before moving – further exacerbating the vacancy issue.

There seems to be a glut of available stock between 90,000 and 150,000 square feet, including two properties in Brea, one in Fullerton, one in Garden Grove, two in Anaheim and four south of the Garden Grove freeway in Irvine.

The sizes above 150,000 and short of 200,000 find three alternatives in Anaheim and Irvine. Combined there are 13 units that need occupants, five are completed and open for business and the other eight will deliver this year.

Generally, all are for lease only, which eliminates occupants in this size who want to own. Asking rates exceed $2.00 triple net. Class A buildings leased for less than a buck in the mid-2000s.

So what does all of this mean? In this author’s opinion, we have a demand problem coupled with an inventory surplus.

Generally, that imbalance is solved through an increase in demand through price reductions. No one has moved in this direction, but someone will soon, which resets the market comps to a new level. While the reasons behind the absence of tenants are multifaceted, understanding the current market dynamics, exploring ownership models and analyzing the evolving demands of businesses are key to unraveling this puzzle.

By embracing innovative solutions and long-term thinking, Orange County can unlock the potential of these idle spaces, ensuring a vibrant and prosperous future for the region’s industrial landscape.

Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714.564.7104 or abuchanan@lee-associates.com.

Source: Orange County Register