NEWPORT BEACH, CA—A majority of industrial tenants seeking expansions are doing so by relocating, since the Orange County industrial market has reached a tremendously low vacancy rate of 2.6%, DAUM Commercial Real Estate Services’ senior associate Rick Turner tells GlobeSt.com. Turner recently represented the lessee, a medical-device-testing company, in the 10-year lease of a 33,324-square-foot, freestanding industrial building in Irvine, CA. The tenant is relocating from a 16,000-square-foot space in Fountain Valley directed, doubling its footprint in Orange County.
We spoke with Turner about why industrial tenants are expanding their OC footprints, how they are doing it and how landlords are approaching these challenges and opportunities.
GlobeSt.com: Why are industrial tenants increasing their footprints in Orange County?
Turner: Many manufacturing and distribution businesses in OC are expanding out of necessity in order to accommodate current growth. Industrial tenants who emerged from the economic downturn did so with a stronger strategic approach to decision making, and as a result, many of these companies are thriving and expanding.
Much of the current expansion activity in Orange County is taking place in the healthcare, technology and transportation sectors. Many of these companies are seeking expansion plans that keep them close to their Orange County customer base.
Further, Orange County has always been a sought-after place to do business. The county’s strategic central location in close proximity to ports and the Inland Empire give industrial tenants easy access, while the high quality of life in OC delivers both recruiting and retention benefits as companies seek to attract and retain key talent.
GlobeSt.com: In most cases, does this mean relocation to a different building, or can the expansions be accommodated within their current building?
Turner: The Orange County industrial market has reached a tremendously low vacancy rate of 2.6%, which means that tenant expansions within existing buildings can rarely be accommodated. For that reason, a majority of the companies seeking expansions are doing so by relocating.
When a tenant begins its search for relocation and expansion, most will aim for a space in close proximity to their existing facility; however, today’s market is not delivering many of these solutions.
By contrast, industrial tenants who expand their searches geographically are more likely to find properties that best meet their needs. For example, DAUM recently helped a medical-device-testing company to relocate and expand into a high-image building in Irvine. The company had originally sought to stay near its previous location in Fountain Valley, but because it was willing to look at options outside its original geographical scope, we were able to identify an ideal solution that met all of its needs.
GlobeSt.com: How are landlords approaching these challenges/opportunities?
Turner: We are clearly in a landlord’s market. Average industrial rents are increasing at rates of 8.8% year-over-year based on tight vacancy and high competition for space. In response, many landlords are lowering TI allowances and working to lock in longer-term leases, typically in the five-year range.
However, the current industrial climate is not without its challenges for landlords. For example, many landlords have high-credit in-place tenants who are paying under-market rents. These landlords are faced with an important decision: should they renew their well-performing, proven tenants with a minimal increas, or take the risk of asking for higher rents, which are more on par with the market? We advise many clients in this situation, and we’ve helped many to negotiate increased lease value while retaining strong in-place tenants.
GlobeSt.com: What else should our readers know about industrial tenants expanding?
Turner: Businesses looking to expand at any point in the near future should start their search now. Inventory is extremely limited, meaning that tenants are likely to find their optimal property during their second or third search, as opposed to their first. To successfully navigate this supply-constrained market, smart tenants will seek out broker partners who not only know the current market but can identify creative solutions. Further, it’s important for today’s industrial tenants to remain open-minded and receptive to new ideas. There are solutions out there for each company—it just takes a bit of time to find them.
This article originally appeared on GlobeSt.com