2017 Ends With Massive Absorption

The San Gabriel Valley consists of 31 cities and 400 square miles, with more than 1.8 million residents. International trade, especially with the Pacific Rim, continues to be a vital aspect of the growing economy. Rents in the San Gabriel Valley market have surpassed previous peaks. Exceptionally low vacancy rates and rising rental rates lead many tenants to consider purchasing their real estate.

Key Takeaways:

  • Net absorption totaled 938,200 SF for the quarter, the 29th consecutive quarter of growing industrial demand. This was due to fully occupied newly constructed buildings.
  • Average asking lease rates increased $0.02 per square foot (PSF) triple net (NNN) to end at $0.72, the highest for the San Gabriel Valley ever. Rents have steadily increased as vacancy rates hit historic lows.
  • Vacancy rates remained flat at 1.4%.
  • Sales and leasing activity totaled 2,212,600 square feet (SF), which breaks down into 11 sales (443,800 SF) and 23 leases (1,768,800 SF).
  • A total of 1,191,600 SF remains under construction. The San Gabriel Valley is a tight infill market with few opportunities to develop additional industrial space.

Outlook:

Future quarters will see more industrial space brought to market. It is expected this will have little impact on the vacancy rate as the San Gabriel Valley remains one of the most sought-after markets in all of the Los Angeles Basin. Absorption will likely be higher in future quarters as recently completed buildings are occupied by the growing businesses in the region. Rents have continued to press upward, blowing past their previous peak, and will continue to rise in future quarters. Tenants can expect to pay a premium for all types of industrial space, and those who signed leases five years ago can expect rents to increase roughly 30% upon renewal. This is the primary reason why tenants in the San Gabriel Valley increasingly choose to own their properties and be insulated from fluctuating market conditions.

As rental rates and sales prices continue to rise in the San Gabriel Valley, there is increased pressure to develop and reposition functionally obsolete industrial space. The full impact of the GOP tax bill looks to place new deductions for pass-through entities and make value-add strategies even more appealing. This will benefit real estate investment vehicles and will likely lead to a flood of private capital into commercial real estate in the following years.

Tight market conditions, limited development and rising industrial rents are expected to persist in the San Gabriel Valley industrial market. The surge in rents is prompting many users to consider buying their properties, however available inventory is insufficient to meet demand. New projects that completed this quarter will likely be leased or sold in short order, leading to further decreases in the vacancy rate. Market conditions will continue to remain tight as the major industrial drivers of the San Gabriel Valley—import/export businesses, food manufacturing and life sciences—continue to expand.