Vacancy Rises On Construction Completions
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 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. The vacancy rate rose 30 basis points to 1.5% and remains near historic lows. Vacancy was tightest in the LAX/El Segundo/Hawthorne submarket at 0.6% and highest in the Torrance market at 4.0%. Industrial demand reported negative 274,200 square feet of net absorption this quarter. Sales and leasing activity totaled 1,730,800 square feet this quarter. This was broken down into seven sales (187,700 square feet) and 31 leases (1,543,100 square feet).
Average asking rents held steady at $0.82 PSF NNN. Asking rents reached their highest levels ever and are expected to rise in future quarters. Even marginal space in the South Bay is getting multiple offers and tenants are having to expand their search criteria in order to find suitable space. New supply this quarter totaled 553,600 square feet across two projects. Only 147,100 square feet of space remains under construction, an incredibly small amount for a 214.4-million-square-foot industrial market. Development is exceedingly difficult in the South Bay, where raw land, if available, sells for a premium. 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.
- Vacancy increased 30 basis points to 1.5% as new vacant buildings were brought to market.
- New space totaling 553,600 square feet (SF) was brought to market this quarter, and 147,100 square feet is currently under construction and is expected to be delivered in the next 12 months.
- Net absorption recorded negative 274,200 square feet this quarter.
- Industrial rents remained steady over the quarter at $0.82 per square foot (PSF) triple net (NNN). Rents increased 5.7% over the last 12 months and are at their highest recorded point.
- Sales and leasing activity totaled 1,730,800 square feet, which breaks down into 7 sales (187,700 square feet) and 31 leases (1,543,100 square feet).
Tight market conditions are expected to persist in the South Bay industrial market for 2018. Rents are at their highest-ever levels, prompting many users to consider buying their properties. However, the available inventory is insufficient to meet demand. 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.
Future quarters are likely to see falling vacancy rates as newly constructed buildings are leased. Absorption is likely to be positive in future quarters when newly constructed buildings are leased. 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 roughly 45% upon renewal. We are at the tail end of a construction boom, and only a single project remains under construction. Development will continue to be limited for build-to-suit projects or creative rehabilitation of underperforming space. Industrial real estate remains in high demand, pushing capitalization rates lower. This is due to anticipated appreciation in sale prices that accompany tight infill markets.