Understanding Industrial Occupancy Costs
If you are an industrial tenant, occupancy cost is typically one of the largest expenses you incur as a business owner. So, it is vitally important that you consider each component of occupancy carefully before making your decision on which building to lease.
Thankfully, tenants have at least some negotiating power now that vacancy has risen to more historically normal levels. At the height of the supply crunch that peaked in 2023, industrial vacancy in Orange County fell to just 1.05%, compared to 5.8% in the first quarter of 2026. Consequently, you, as a prospective tenant, now have a wider range of quality well-maintained buildings to choose from and negotiate for.
The Impact of Lease Rates on Occupancy Cost
The ‘coupon’ or ‘base’ rate you pay is the biggest chunk of your overall cost. Average Asking Lease Rates rose sharply from 2011 through 2023, topping out at $1.70 and slipping back by roughly 13.5% since to $1.47. Historically speaking, this is a mild pullpack, but it is not insignificant. Plus, there is additional opportunity for tenants in the way of landlord concessions that include free rent, tenant improvement allowances and other concessions that had all but disappeared for more than a decade.
Supply, Demand, and Market Conditions in Orange County
In previous economic up-cycles developers responded by adding new inventory to meet the rise in demand, but this time around the delivery of new space ran thin due to the extraordinary cost of what little land was left to build on. So, when increasing demand collided with static supply, vacancy fell sharply and landlords were emboldened to raise lease rates and sales prices. And, for more than a decade, they held all the cards in negotiations.
Why Building Maintenance Matters in Industrial Leasing
The lack of construction meant the aging supply of inventory was not being mitigated by new first-generation space for tenants to occupy. In fact, most Orange County cities have seen little in the way of new construction since the late 1980’s, and much of that inventory has not been properly maintained, which is a cost primarily borne by tenants.
Most leases call for the tenant to maintain all or nearly all components of the building. In a net lease, you, as occupier, pay for everything, just as if you owned the building yourself. So, if you lease a facility with aging building systems like the roof and HVAC, chances are you will spend more on basic maintenance throughout the lease. In a gross lease scenario, all maintenance costs except for the roof, outside walls, and foundation are still your responsibility as a tenant. Only capital replacement costs are shared with the landlord.
Inspecting the Property Before Signing a Lease
This makes clear the importance of fully inspecting that facility and insisting on seeing maintenance records before you commit to it, so that you can successfully negotiate with the landlord to deliver the property in good condition at the start of your lease.
It may cost you a few bucks up front to gather the data, but it could save you thousands down the road. If you do discover aging systems that have been poorly maintained or are already beyond their useful life, you may be able to carve responsibility for them out of the lease beforehand, which will lower your occupancy cost over time.
Property Taxes and Their Effect on Occupancy Costs
The property tax basis of each property you are considering is another major component of occupancy cost. If you lease on a net basis, you will be responsible for the entire property tax bill. So, what the landlord paid for his building and when will determine what that cost will be. If he bought it last year, the taxes will be more than double what they would be if he bought it ten years ago, as Proposition 13 sets the base levy at the point of acquisition.
At today’s price point, just the property tax bill could add up to 35 cents per square foot or more per month to your occupancy cost. That same building purchased 10 years ago would have a property tax bill of less than half that amount.
Evaluating Different Types of Landlords
Knowing what type of landlord you are dealing with and their current circumstances is also of importance. If the prospective ownership entity is institutional in nature, chances are good that the property has been properly maintained and good records exist to confirm the condition of the building. They probably own multiple properties in the area, have substantial financial resources and are current on market trends regarding lease rates and concessions.
That can work to your advantage, as institutional owners are interested in stable cash flow and low vacancy, and will negotiate terms that will secure quality tenants in the shortest time possible, while a local owner may negotiate from a position of specific need and not have records that will allow you to evaluate the potential risk associated with future maintenance expense.
Understanding Lease Agreements and Hidden Costs
Bottom line: it’s not all about the lease rate when it comes to occupancy costs. In the standard AIR Net and Gross Leases, the most widely used in Orange County, there are 53 paragraphs spanning 17 pages of fine print. Many of them could have cost consequences to you if not fully understood and modified to reflect the conditions of the property being leased.
Final Thoughts on Managing Occupancy Cost
If you’d like to learn more about controlling occupancy cost, just give us a call. We are here to help.