Assessing Tenant Demand & Analyzing Opportunities to Build Industrial Space
Brian Westre, Vice President for ARCO National Construction, recently joined fellow industry experts as a speaker at Bisnow’s Orange County Construction & Development Summit. Brian’s panel discussed current supply and demand drivers, construction pricing and material lead times, and what is driving decision-making for tenants.
Current Market Trends & Challenges
As a backlog of space created by the pandemic has hit the market, and with financing becoming more challenging, the Orange County industrial market is adjusting back toward pre-pandemic activity levels. Vacancy rates in the region are hovering around 3%, up from the historic lows of under 1% seen in 2022, signaling a cooling of demand. Similarly, leasing activity and lease rates have continued to fall, and land costs have significantly decreased compared to the previous years’ peak levels.
As a result, many new development projects are being put on hold as developers face difficulty quantifying the financial feasibility of new builds. With the reduction in tenant urgency and lower rent expectations, some projects that were in the pipeline are now stalled. However, despite existing challenges, the industrial market in Orange County retains a positive outlook for the years ahead. As interest rates decline and uncertainties diminish, activity is likely to rise.
Industrial Trends Driven by Tenant Demand
Both in Orange County and nationally, tenant demand for industrial space is largely being driven by users requiring specialty space like those in the food and beverage and pharmaceutical industries. This, combined with current dry rent rates in Orange County not supporting feasibility of many new developments, has led to an increase in entitled projects being redesigned to meet the needs of specialty users. Owners are becoming more and more willing to incorporate specialized upgrades such as increased utility systems, helping justify higher rent rates and making projects more financially viable.
Additionally, in Orange County, many cold storage end-users are choosing to retrofit existing warehouse spaces rather than build new due to the continued demand for temperature-controlled facilities and the availability of surplus industrial space. Retrofitting offers significant advantages, including prime locations and faster project timelines, which are crucial for food and beverage and pharmaceutical companies looking to meet growing market needs. These industries are particularly focused on securing buildings that can accommodate necessary power upgrades, as electrical capacity is currently a key driver of project timelines.
Pictured: 116,766 SF Cold Storage Facility Renovation for Alpine Food Distributing, Inc. in Vernon, California
Construction Pricing & Material Lead Times
Construction costs have been stabilizing nationally and in Orange County largely due to a reduction in subcontractor backlog, which has increased competition and driven down pricing. In Orange County, construction prices have dropped by approximately 7-10%, with even larger declines seen in certain regions, such as the Southeast and Southwest. Prices for key construction materials like steel, roofing, and decking—which spiked dramatically during the COVID pandemic—are now seeing the largest reductions. While this downward trend in pricing is a welcome relief for owners and developers, it is unlikely to remain long-term as the market continues to recover and contractors start regaining their backlogs.
While many supply chain challenges have stabilized, lead times for some materials, such as electrical switchgear, remain lengthy.
The Design-Build Advantage
The design-build approach offers significant benefits for the Orange County industrial sector, particularly in addressing the challenges faced by project owners and tenants. As a design-builder, ARCO National Construction is actively involved in the tenant side of industrial development. ARCO has seen an increase in the number of owners with entitled projects that are ready to move forward but are constrained by current market conditions. To address this, ARCO has been working with owners to revise and adapt existing plans to better meet the needs of industries with strong demand, such as cold storage for food and beverage companies and pharmaceuticals. By incorporating specialized upgrades—such as enhancing utility systems—ARCO is helping make these projects more viable, as these improvements allow owners to justify higher rents and make their developments financially feasible in a challenging market.
Additionally, ARCO’s design-build approach is a key asset in overcoming supply chain challenges. By redesigning electrical plans to use readily available materials and working directly with manufacturers and utility companies, ARCO helps mitigate delays caused by current supply chain challenges.
Pictured: 1.4 Million SF Cold Storage Renovation for a Regional Grocery Retailer in San Bernardino County, California
About ARCO National Construction | Pacific Coast
ARCO National Construction | Pacific Coast is a premier, full-service design-build general contractor with more than 30 years of experience providing clients with complete project delivery throughout the United States. As the nation’s largest builder of warehouse and distribution space, we pride ourselves in offering the best, most cost-effective, single-source, turnkey solutions and adding value to every project.
With 48 offices in major markets coast to coast, ARCO offers the strength and presence of a national general contractor with the focus, attention, and regional expertise of a local builder. ARCO’s proven design-build approach combines quality of design and construction, management of expense, and adherence to schedule into a single point of responsibility. ARCO offers preliminary design at no cost to our customers to remove the risk of substantial upfront costs.
