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Industrial Tenant Expansion Opportunities Limited in LA Metro Area Due to Decreasing Vacancy Rates

4/27/16

Tenants are hard pressed to find expansion space in the LA Metro as vacancy rates for industrial buildings in Los Angeles and Orange Counties continue to decline. Meanwhile, the Inland Empire, despite absorbing more than 19 msf of space over the past five quarters, retains the same 3.4 percent vacancy rate as a year ago, according to a first quarter 2016 report issued by a partnership of the AIR Commercial Real Estate Association (AIR) and Xceligent.

Matt Nelson, director of analytics for AIR/Xceligent, noted that vacancies have declined in Los Angeles and Orange Counties even with several large developments being delivered.

“What stands out for the first quarter is that the Mid-Counties market has the lowest vacancy rate of any submarket in the Greater Los Angeles area at 0.7 percent while closing out the first quarter with 315k sf of positive net absorption,” Nelson said. He noted, however, that with a very low amount of Class A product on the market and a good amount of low clear, less functional buildings being redeveloped into residential or creative offices uses, tenants are very limited in expansion options. The one exception is the Inland Empire which still shows a 3.4 percent vacancy despite impressive absorption.

The AIR/Xceligent report shows that net absorption of space has slowed in Orange and Los Angeles Counties due to lack of supply. “Meanwhile, the Inland Empire will continue to see strong leasing activity, but the vacancy rate may increase slightly due to the amount of new product in the pipeline,” Nelson said.

The study shows that there are several projects currently underway in the South Bay, San Gabriel Valley and Mid-Counties markets. Also, the San Fernando Valley has a few developments that broke ground earlier this year.

“With increasing rental rates, historically low vacancy numbers and record volumes at the ports, expect the vacancy rate to remain low even with the amount of new construction in the pipeline,” Nelson said.

The following are individual submarket highlights from the AIR/Xceligent report:

• The Inland Empire kicked off 2016 right where it left off from a record 2015, posting a solid 1.8 msf of positive net absorption in the first quarter. Moreover, 6.95 msf of new product was delivered, and 2.7 msf of the new construction remains vacant. Amazon continues to expand its IE presence by signing a new 1.1 msf lease at the newly constructed Alliance California Gateway South development in San Bernardino.
• The Orange County industrial market continues to see healthy activity by closing out the first quarter with positive net absorption of 399.4k sf. 405k sf of new construction was delivered in the first quarter while 230k sf of new industrial space is underway.
• The Los Angeles County industrial market closed out the first quarter of 2016 with a total of 941.3k sf of positive net absorption, lowering the total vacancy rate to 1.1 percent. The LA Central submarket recorded the most activity by absorbing 542.9k sf during the first quarter. Construction activity remains active with 1 msf of new product added to the base while just over 3 msf is currently under development.
• The Ventura County industrial market got off to a slow start in the fist quarter, posting 37.3k sf of negative net absorption. The market’s vacancy remains at 3.7 percent with a limited number of new leases and a few medium sized tenants moving out. Construction activity remains dormant throughout the region with no new projects breaking ground in the first quarter.





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