Second Quarter 2025
Orange County Industrial Faces Headwinds as E-Commerce Demand Continues to Normalize in Q2 2025
Vacancy rates are rising and rents are flattening in Orange County’s industrial market, but resilient port activity continues to drive warehousing demand in Q2 2025.
Resilient cargo volumes sustain demand, while a more flexible market helps absorb sublease space.
MARKET OVERVIEW
In Q2 2025, industrial vacancy in Orange County continued to rise, pushing the overall vacancy rate up by 120 basis points year over year to 5.5%, 20 basis points higher than in Q1. Over the past two years, approximately 4.9 million square feet of new construction has been added, but net absorption has been negative, exceeding 5.2 million square feet, underscoring a significant reversal in the industrial market’s trajectory.
Construction activity remains elevated. Space under construction rose 15.3% year over year and 9.8% quarter over quarter at 2,261,194 square feet. However, completed construction in the first half of 2025 totaled just 788,642 square feet, down 26.9% compared to the first half of 2024 and a sharp 79.1% drop from the previous quarter. Developers, previously racing to meet the surging demand for warehouse space driven by e-commerce, have begun to slow deliveries as market conditions evolve.
The primary driver of new development, rent growth, has also moderated. Average asking rents in Q2 fell 6.1% year over year to $1.55 per square foot triple net, remaining flat quarter over quarter.
On the investment side, buyer activity picked up as prices adjusted. Year-to-date sales volume (measured in square feet) rose 44.1% compared to the same period in 2024, while the average price per square foot fell by 14.4%. In leasing, activity declined 32.3% from the prior quarter but remained stable year over year, up 0.8%, with over 5.1 million square feet leased so far in 2025, closely tracking the first half of last year.
TRENDS TO WATCH
Tenants are gaining leverage to negotiate more favorable lease terms, raising concerns among landlords as leasing velocity slows. The market is increasingly shaped by a growing supply of e-commerce warehousing options, as companies seek flexible solutions to meet evolving demand. A major driver of this shift is the trend of reducing excess warehouse space, which has led to a significant drop in available sublease inventory, down 26.7% quarter over quarter and 10.2% year over year in Q2 2025, totaling approximately 1.3 million square feet, a two-year low.
This whittling down of sublease space signals that companies with warehousing requirements will have a broader array of options, especially as cargo throughput at Southern California ports continues to show resilience despite the threat of tariffs. According to the latest data from the Ports of Los Angeles and Long Beach, combined inbound TEU cargo volumes, a key indicator of warehouse demand, rose 6.2% year-to-date through June 2025, reinforcing the continued need for distribution space supporting e-commerce and retail supply chains.
While the pace of growth is expected to moderate, elevated prices and interest rates continue to weigh on industrial sales. Nonetheless, quality space remains in demand and commands a premium. Sales volume for the first half of 2025 rose 30.2% compared to the same period last year, driven by strategic acquisition opportunities. Reflecting this trend, Buchanan Street Partners, a real estate investment management firm based in Newport Beach, acquired Spectrum Centre Business Park in Lake Forest for $94.3 million, approximately $268 per square foot. The campus comprises 16 flex, office, and industrial buildings totaling 232,818 square feet and is 80% occupied.
The 4.7% quarterly and 9.3% annual drop in the median price per square foot to $349 likely contributed to sustained buyer interest, suggesting that price adjustments are helping to support transaction volume despite broader market headwinds. With interest rates remaining elevated and demand cooling, pricing is expected to stabilize further heading into the second half of the year.
