Vacancy And Asking Rents Remain Flat

The Mid Counties remains the tightest industrial market in Southern California, with a vacancy rate of only 0.6%. This has left limited options for firms looking to expand in the region. Despite the addition of 199,600 SF of vacant space added to the base this quarter, the vacancy rate remained unchanged. There is currently 819,800 SF of space under construction. Sales and leasing activity registered 1,032,400 SF. Tight market conditions are limiting the number of sale and lease transactions. Rents remained unchanged at $0.64 PSF NNN, which is the highest average rental rate ever for this region.

Key Takeaways:

  • Average asking rents remained at $0.64 PSF NNN over the quarter and are up $0.04 PSF NNN from 12 months ago. Rates have surpassed their previous peak last seen in 2007.

  • The overall vacancy rate was 0.6%, unchanged over the previous quarter. Over the past 12 months, the vacancy rate has decreased 20 basis points from 0.8% reported in Q4 2015.

  • Sales and leasing activity was 1,032,400 SF for the quarter, broken into 6 sales totaling 192,000 SF and 24 leases totaling 840,400 SF.

  • Net absorption remained positive at 120,600 SF for the quarter and was 431,900 SF for all of 2016.

  • There was 199,600 SF of new space added to the market in a single building. There remains 819,800 SF of space currently under construction.

Outlook:

The Mid Counties market has hit a record low vacancy rate of 0.6%. This is putting upward pressure on asking rates which have hit a new market peak. As such, there is continued strong demand to purchase real estate assets rather than leasing them. Vacancy is expected to remain below 1% for the foreseeable future. There is a lack of space for businesses to expand in the Mid Counties. Future quarters may see a slight uptick in vacancy as new construction is brought to market.

Absorption is likely to be flat in future quarters until new buildings are brought to the market. Rents will continue to rise in future quarters and tenants can expect to pay a premium for all types of industrial space. Tenants who signed leases 5 years ago can expect their rent to increase significantly upon renewal.

Increasing rental rates may generate new construction activity and building demand. There has been increased investor focus on fully leased industrial assets in prime infill locations. Consequently, we expect more investment sales to occur in future quarters, driving up sales prices and further compressing cap rates.