2018 Starts Strong As Projects Finish Construction

The Mid-Counties remains the tightest industrial market in Southern California, with a vacancy rate of 0.7%. This has left very few options for firms looking to expand in that market. As new construction tapers off,  tenants who need to be located in this marketplace will be paying a premium as quality space remains scarce. The vacancy rate remained the lowest in Southern California, ending the quarter at 0.7%. Buildings totaling 612,700 square feet remain under construction, which will not have a significant impact on the vacancy rate in future quarters. Net absorption reached 1,123,600 square feet this quarter, the highest quarterly positive net absorption ever recorded for this market.

Sales and leasing activity totaled 2,673,300 square feet. Tight market conditions for quality buildings continue to limit options for tenants looking to expand. Rents increased to $0.74 PSF NNN, which is the highest average rental rate ever for this market. Significant barriers to creating new supply and increased demand by tenants are putting continued upward pressure on rents. This will continue to make the Mid-Counties one of the more expensive markets in Southern California. New construction deliveries totaled 1,004,100 square feet this quarter, while 612,700 square feet of additional space remains under construction in numerous projects. Development opportunities continue to be scarce and land prices for even marginal industrial parcels are seeing new highs. Capitalization rates continued to tighten in Los Angeles County, averaging 4.4% in the first quarter of 2018. Average sale prices rose over the quarter to $175 PSF as smaller deals dominated this quarter.

Key Takeaways:

  • This quarter 1,104,100 square feet of industrial space finished construction, the majority of which was pre-leased.

  • Average asking rents increased $0.02 per square foot over the prior quarter to $0.74 NNN.

  • The overall vacancy rate was 0.7%, down 10 basis points (BPS) from the previous quarter. The vacancy rate has remained below 1% for the last ten quarters.

  • Sales and leasing activity totaled 2,673,300 square feet for the quarter, including eight sales (286,500 square feet) and 33 leases (2,386,800 square feet).

  • Net absorption was positive at 1,123,600 square feet for the quarter.

  • Only 612,700 square feet remains under construction as numerous projects have completed construction.

Outlook:

The Mid-Counties market has hit a record-low vacancy rate of 0.7% this quarter, despite the addition of 1,004,100 square feet of new industrial space. High industrial demand and low inventory continues to put upward pressure on asking rates, which have hit a new peak every quarter for the last two years. As rents continue to rise, industrial users continue to purchase real estate, which is further driving up sale prices.

Vacancy is expected to remain below 1% for the foreseeable future. Lack of space continues to hinder businesses from expanding in the Mid-Counties. Tenants are advised to start their building search well in advance of their lease termination. Absorption will likely be flat in future quarters as the amount of space under construction continues to fall. 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 their rents to increase significantly upon renewal. Increasing rental rates and sales prices, along with continued low vacancy rates, may lead to older buildings being redeveloped into new projects. Industrial real estate will remain in high demand, pushing capitalization rates lower. This is due to anticipated appreciation in sale prices that accompany tight infill markets.