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LA Area Industrial Submarkets Facing Low Vacancies and Increasing Interest in Higher-Use Conversion Projects

2/10/16

“Low water mark” vacancy rates for industrial real estate in numerous L.A. Metro submarkets coupled with rising opportunities for re-positioning aging buildings to higher use were among the main topics discussed at the recent, 23rd Annual “Market Review & Forecast” presented by the AIR Commercial Real Estate Association in downtown Los Angeles. The January 27 event attracted a near-record 290 people.

A blue chip lineup of nine panelists comprised of top producers in each major submarket shared insightful commentaries focused on the central activities of the past year and what to expect in 2016.

Launching the presentations and addressing the South Bay submarket, Steve Bohannon, senior director of Cushman & Wakefield, said this “mature infill market” had a banner year in 2015 with all-time high activity”, sparking a new low of 1.7 percent vacancy for industrial building space. He reported that one industrial property at Harbor Gateway recently attracted a sale price of $194 psf. Citing an office vacancy of 20 percent, he said El Segundo is leading the way in demand. For 2016, Bohannon sees increased re-positioning of buildings to higher use in the South Bay and stepped up migration from the more expensive Westside. Finally, he declared that the market will receive a major boost with the arrival of the Los Angeles Rams.

Speaking about the Inland Empire, Ron Washle, senior managing director of Newmark Grubb Knight Frank, reported that the submarket accounted for 8.5 percent of ALL industrial property absorbed for all of the U.S. in 2015. “Meanwhile, rental rates have gone up over 50 percent over the past few years, and nine transactions were completed for buildings over 950k sf in the last year,” he said. e-commerce is a big driver in the market and will stay that way, Washle added.

Jon Reno, senior vice president/managing director for Heger Industrial, said the vacancy rate overall in the Central Region is 4.2 percent while it dips to 3.3 percent in downtown L.A. “This is a low water mark in vacancy for the submarket,” Reno said. “This submarket is not a big box area. It is distinguished by buildings, many aging, in the 36k sf to 46k sf size range. Accordingly, there are opportunities for conversion of older buildings to creative uses and accompanying increased rents,” Reno said. For 2016, Reno sees continued redevelopment of older structures where he said most of the activity will come.

Stating that vacancy is “next to nothing” in Orange County, Steve Wagner, senior vice president of JLL cited a 2.7 percent vacancy for industrial space. “Don’t over-negotiate deals in this market,” Wagner advised, “because there have been lots of changes in the last six months alone as rates continue rising and sellers are capitalizing on higher prices.”

Terming the Mid-Counties the “bulls-eye” area because of its outstanding access to all of Southern California Christopher Sheehan, senior vice president of Colliers International, reported a miniscule .08 percent vacancy and gross absorption of space up 8.8 percent along with rising lease rates. Land costs, he added, are up 20 percent and new construction in bouncing back.

Citing a lack of product for driving up lease rates in the San Fernando and Santa Clarita Valleys, David Young, senior vice president of NAI Capital, reported a 2 percent vacancy in the SF Valley and a 2.7 percent vacancy in Santa Clarita. By way of illustration, he said 98 percent of the submarket’s space is occupied!

“Sale and lease activity decreased during the year by 8 percent due to lack of supply and no new construction. I’ve never seen a vacancy rate this low for the region,” Young said. For 2016, he foresees continued appreciation of rent and sale prices with very little new construction.

Calling Ventura County a “unique market” with typically differing characteristics from one local market to another, Mike Tingus, principal/chairman of Lee & Associates-LA North/Ventura, said the area is distinguished by family businesses occupying from 10k sf to 20k sf buildings. He reported a 4 percent vacancy rate for the submarket, “which is really closer to 3-3.5 percent,” he said. “There’s been a steady decline in vacancies in the submarket, while we’re experiencing a median sale price of $112 psf. But, above all, interested parties should look closely at the differences in localities,” Tingus said.

Jason Chao, first vice president for CBRE, called the Eastern submarket “extremely tight” led by City of Industry with a vacancy rate of .08 percent. He said 1.68 msf of industrial space was delivered in the area in 2015. The major news for 2016, Chao said, would be the delivery of seven new projects totaling 2 msf, with 4.8 msf in the next three years. “This is welcomed because we haven’t seen new development like this since 2007,” Chao said.

Calling it “the end of industrial real estate on the West Side,” Carl Muhlstein, regional director for JLL, said larger users are jumping 10-20 miles for relocation from areas such as Santa Monica. I have not seen the vacancy rate this high – 17 percent in Santa Monica – in years,” Muhlstein said.

He noted that the eastern portion of downtown Los Angeles “never looked so good to users. Every week you see a new deal being announced in the area. The Arts District is a good example where area buildings have been transformed for creative users that were previously attracted to areas like Santa Monica. It will be interesting to see how the gritty Arts District impacts Santa Monica,” Muhlstein said.






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