18 Dec The State of Our Economy: A Decade in Review
State of the Economy: Orange County, and California overall, has benefited from strong job growth year over year. We are slightly lower than we were in 2018, which realized a 2% job growth and we are currently averaging a 1.8% job growth in 2019. This is up significantly over the drop we realized in 2009 which yielded an all-time low of -8%. Thus, unemployment rates are down below 4% both Nationally and in Orange County, which are at 3.8% and 3.5% respectively. Orange County’s population is back to the same levels we were in 2008 at approximately 20K people, down from 40K people in 1991.
State of the Market for Office: Currently there is approximately 250K sqft of office space under construction, down from the all-time high of 2.7M in 2017. Vacancy rates remain steady at approximately 9.7%, while delivery and absorption remain constant at approximately 8.5%. The Irvine Spectrum in Orange County has consistently brought online new product year over year since inception, realizing over 3M sqft of office space since 2011. Tustin, Fountain Valley and Newport beach fall second to the Spectrum individually and cumulatively and have delivered over 3.2M sqft of office space since 2011. Rental growth for office space nationally averages 1.5% in 2019, down from the high of 8.7% in 2015, with the lowest rental absorption of -13.1% in 2009.
State of the Market for Industrial: Since 2017, 50K sqft of industrial real estate has been demolished in order to create space for new real estate product within these in fill lots throughout Orange County. Thus, we have seen a very low delivery of new industrial product coming online. Vacancy rates remain low, and the vacancies are generally associated with outdated industrial properties. Demand vs. supply is very strong for the industrial product in the market, which has been maintained.
State of the Market for Retail: There is approximately 400K sqft of retail space under construction in 2019 within Orange County, down from 1.4M in 2016. Given the slow-down of product coming online, the net absorption rate is steady just behind the delivery of new product; with vacancy rates remaining at approximately 4% given mostly within the older product. The malls and entertainment centers are thriving as customers continue to enjoy the experience of shopping, entertainment and gathering. The strip center tends to be struggling more than malls. Repurposing brick and mortar is the new trend, as we are seeing online companies such as Amazon leveraging places such as Kohls for returns, bringing shoppers into the stores who in turn realize a discount to shop at that location. Staples is offering conference room rental spaces, Citibanks are opening coffee shop style banking centers and Starbucks continues to be the location of choice for students to gather and study or socialize and for business meetings across all industries. Other retailers are offering trying new offerings such as yoga classes and live entertainment. Re-inventing the retail experience is the trend today.
Investment by Product: Office space has dominated the market in terms of sales volume in Orange County since 2006, reaching a high in 2015 at $3.5B dollars’ worth of sales. Currently office space sales transactions are at $2.9B dollars. Industrial sales volume fell just behind office space realizing $2.4B dollars in sales in 2019, followed by Multi-family at $.9B and retail at $.6B dollars in sales transactions. Much of these sales transactions are a factor of the product availability within Orange County, driving demand and absorption rates respectively. Multi-family dominates all product types in terms of price index, reaching 220 in 2019, with Industrial falling just behind Multi-family with a price index of 180 in 2019. Retail and office space are tied with a price index of 142 in 2019.
Cap Rates by Product Type: Cap rates remain very strong across all product types within Orange County: with office space realizing an average cap rate of 5.8%, retail cap rates overall are at 5.2%, industrial cap rates are running out at 4.9% and Multi-family cap rates remain very strong averaging 4.1%. Overall commercial products continue to be a strong investment and are thriving in this market.