Industrial Lag

The region's office building boom hasn't carried over to the tight industrial market.

Despite local vacancy rates of nearly 4%, only about 1.3 million square feet of industrial space was under construction here at the end of 2006, according to figures from the Newport Beach-based office of Grubb & Ellis Co.

That's about half of what's being built in San Diego, a third of the construction under way in Los Angeles, and far below the 21 million square feet of industrial space being built in the Inland Empire.

It's still the most industrial development OC has seen since 2001, when about 2.2 million square feet of space was being built.

Five years of limited construction means "a lot of the same trends are going to be in play again this year," according to Jeff Cannon, corporate managing director for the Irvine office of Studley Inc.

"Last year's supply was tighter than ever, and this year is going to be very tight as well," he said.

While industrial development is lagging here, there's more office construction in OC-about 4 million square feet-than any other county in the state.

Local office developers can cover their construction costs by charging record-high rents. That's not the case for industrial developers.

If anything, industrial developers here will convert their existing, leased multi-tenant industrial parks into for-sale industrial condos. taking more space off the market, according to brokers with Voit Commercial Brokerage LP.

Much of the local industrial construction now under way isn't likely to appeal to a large part of the area's industrial base, either.

Pacific Gateway Business Center, the 44-acre Seal Beach development being built by Gardena-based developer Overton Moore Properties, has a specific market in mind.

Pacific Gateway is tapping businesses in West Orange County and Los Angeles' South Bay-Torrance, Redondo Beach, Hermosa Beach, Manhattan Beach and El Segundo-particularly those companies with a need to be near the ports, said Bob Goodmanson, senior vice president for CB Richard Ellis Group Inc., which is marketing the project.

The project isn't likely to draw too much interest from businesses in South or North counties, he said.

The development, with 10 buildings totaling about 830,000 square feet, is wrapping up its first phase of construction.

Six buildings are coming on line now for lease, with monthly rents ranging from 69 cents to 84 cents per square foot. A seventh building totaling about 45.000 square feet, originally slated for lease, now is being sold, Goodmanson said.

The lack of new space, near-record low levels of vacancies, and expectations of more double-digit rent increases for existing buildings don't bode well for the area's larger industrial tenants.

Those market conditions have caught the attention of big-name investors.

* Locally-based industrial developers such as Newport Beach-based Bixby Land Co. have begun investing in existing properties. Bixby made its recent first local deal earlier this year, buying the Lake Forest headquarters of General Monitors Inc.

* Houston developer Mines Interests LP made its first local industrial buy after several office plays, with the 260,000-squarefoot Irvine warehouse that was used by athletic shoemaker American Sporting Goods Corp.

* Chicago-based First Industrial Realty Trust Inc.. one of the country's largest industrial landlords, just completed its first acquisition here in several years-a 366,629-squarefoot site in Santa Ana (see story, page 23).

"The yields are at an all-time high, but there are still buyers interested in these properties," said Jeff Chiate, senior director for the Irvine office of Cushtnan & Wakefield Inc. "The industrial investment market here is still dazzling."

Along with little new development, projections of large rent increases this year are the norm. Some estimates speculate that rents could go up as much as 15%.

That said, there are a few positives that tenants should be aware of, said Studley's Cannon.

"I'm a little more optimistic for larger companies-they should have more alternatives, and a little more leverage than last year," Cannon said.

There could he a larger-than-usual amount of existing distribution and warehouse space coming back on the local market this year, after a number of major tenants moved some of their operations to the Inland Empire.

In many cases, this left existing space in OC up for grabs, he said.

Huntington Beach-based surfwear maker Quiksilver Inc. said a year ago that it was moving some distribution operations outside OC, after signing a lease for a 683,000-square-foot warehouse in Mira Loma. That could free up some of the company's space locally, Cannon said.

Sole Technology Inc.. a Lake Forest-based shoe and clothing maker, last year bought a 315,000-square-foot warehouse and distribution building in Fontana. and likely will vacate its 120.778-square-foot warehouse space in OC.

Brea-based Nature's Best, a distributor of vitamins and supplements, is set to move into a 410,000-square-foot warehouse in Chino later this year. The company will leave its 300,000-square-foot distribution center in Brea, Chief Executive Jim Beck said in an earlier interview.

American Sporting Good's old site at 2323 Main St. in Irvine had been slated for conversion into condominiums.

After the housing slowdown. Mines bought the site with an eye on keeping it a higher-end industrial space, once American Sporting Goods leaves.