Net Absorption Dips In Q4 2017

The South Bay remains the premier market for distribution companies and cargo-centered sea-and-air industrial users. It is nearly fully developed, making land is incredibly scarce. Tight market conditions and a lack of larger modern space continue to be deterrents that drive tenants to neighboring markets; primarily to the east.

Key Takeaways:

  • Net absorption recorded negative 295,400 square feet this quarter; the first quarter of negative absorption in the past 30.

  • Industrial rents increased $0.01 per square foot (PSF) triple net (NNN) over the quarter to $0.82. Rents increased 9.3% over the last 12 months and are at their highest recorded point.

  • Sales and leasing activity totaled 1,515,700 square feet, which breaks down into seven sales (328,300 SF) and 34 leases (1,187,400 SF).

  • New space totaling 700,700 square feet is currently under construction and will complete in the next 12 months.

  • Vacancy increased 20 basis points but still remained near historic lows.

Outlook:

Future quarters are likely to see rising vacancy rates as new supply is brought to the market. Absorption is likely to be flat for 2018 as there is little new supply hitting the market and further gains will be hard to achieve. 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 five years ago can expect to their rents to increase roughly 45% upon renewal. We are at the tail end of a construction boom, and new supply will trickle in for 2018. Development will continue to be limited for build-to-suit projects or creative rehabilitation of underperforming 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. Land is incredibly scarce and many industrial users are having to get creative or face paying a premium to secure land for truck, car or trailer storage.