The Big Squeeze – Feeling the Pressure of Low Inventory
They call New York City the Big Apple and New Orleans the Big Easy. When it comes to the industrial property market, Orange County is becoming known as the Big Squeeze. Conditions are such that good value is getting harder to find, competition for space is becoming intense and prices are being forced up by the simple law of supply and demand. Vacancy is now so low, (2.6% at the end of September) that some businesses are forced to stay where they are because a better option is just not available. The result: lower transaction volume and even fewer properties to choose from. Measured in square feet, sale transaction volume in Q3 of 2015 was 47% lower than it was the same time last year. Even leasing activity is feeling the pressure, having dropped by 67% in the same period.
If you have been following recent trends in commercial real estate, this may not come as a big surprise, especially as it relates to property offered for sale. Low interest rates and high loan‐to‐value financing offered through the SBA has driven sales prices beyond the previous peak of 2007. The owner/user scenario makes a lot of sense these days, even with pricing at premium levels. Borrowers can lock in the same monthly payment for up to 25 years, and build equity for themselves in the process rather than line the pockets of a landlord. The problem is finding something to buy, and it’s the lack of sale product that is shifting the pressure to the leasing market. Hence, the Big Squeeze.
Now that we find ourselves in this predicament, how do we work ourselves out of it? There is no simple answer. The addition of new supply would be great, but a lack of available land has development at a near standstill, and what little space is being built is in larger buildings due to rising construction costs. There is little hope of any buildings under 40,000 square feet being built anywhere in Orange County for the foreseeable future. That leaves the vast majority of business owners with only existing inventory to choose from. Many believe that small building development is gone for good.
A significant market correction precipitated by another recession is something none of us want to see, but it may be the only other viable way to increase the pool of available inventory, for sale or for lease. Currently, Orange County is on a fairly healthy economic foundation. Job growth is good, the housing market has rebounded and consumer spending is on the mend. So, a correction in the near term is highly unlikely. Orange County has a broad economic base, with several major employment sectors that mitigate the risk of a downturn, as opposed to markets like Houston that are dependent on a single industry to drive economic growth.
So, how will current conditions impact your business if you lease your current facility? Expect to pay more, get less and have it take more time to find good space. Look for ways to squeeze more value out of every square foot you occupy. Consider staying where you are if you can and reach out to other experts to help you make your decision. Commercial real estate professionals, materials handling specialists, builders, architects and those in the trades can help you optimize your facilities plan. If you wait until your need is immediate, the prospects for a favorable outcome are reduced. As a commercial real estate expert who has assisted hundreds of business owners through several real estate cycles, I can help put you on the right track, and connect you with other experts who can help you make a good decision. Please feel free to call or email anytime if I can be of service.