Strong Absorption Due to Construction Completions

The San Gabriel Valley consists of 31 cities and 400 square miles, with more than 1.8 million residents. International trade, especially with Pacific Rim countries, continues to be a vital aspect of the growing economy. Rents in the San Gabriel Valley market remain at an all-time high. The region still has an exceptionally low vacancy rate, leading many tenants to consider purchasing their real estate.

The vacancy rate fell 20 basis points to 1.3%. Vacancy remained tightest in the San Gabriel submarket at 0.6% and highest in the Foothill Freeway submarket at 2.7%. Industrial demand reported 814,100 square feet of positive net absorption due to fully occupied new construction. Sales and leasing activity totaled 2,295,500 square feet this quarter. Average asking rents remained steady at $0.72 PSF NNN. Despite having hit their highest point, asking rents will likely remain high as demand continues to outpace supply. Asking rents are highest ($0.75 PSF NNN) in the San Gabriel submarket and are lowest in the Industry submarket ($0.70 PSF NNN).

Construction completed this quarter totaled 379,700 square feet in two buildings, while 995,900 square feet of space remains under construction. Land remains at a premium, with developable industrial land topping $1.2 million per acre. Rising industrial rents and limited availability will lead to higher land prices in future quarters. Capitalization rates increased 140 basis point this quarter, averaging 5.8% in the second quarter of 2018. Average sale prices rose over the quarter to $188 PSF.

Key Takeaways:

  • Net absorption was positive, totaling 814,100 square feet for the quarter, mostly due to fully occupied new construction.

  • A total of 379,700 square feet was constructed this quarter, 100% of which was pre-sold. There remains 995,900 square feet of space still under construction.

  • Average asking lease rates held steady at $0.72 per square foot (PSF) triple net (NNN). This remains the highest level for asking rents in the San Gabriel Valley, where rents have been steadily rising for the past eight years.

  • The vacancy rate fell 20 basis points to 1.3%. 

  • Sales and leasing activity totaled 2,295,500 square feet, which breaks down into six sales (447,100 square feet) and 29 leases (1,848,400 square feet). 

Outlook: 

 

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. Market conditions will remain tight as the major industrial drivers of the San Gabriel Valley—import/export businesses, food manufacturing and life sciences—continue to expand.

Future quarters will see more industrial space brought to market, though this is expected to 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 positive in future quarters as new space brought to the market is expected to be quickly absorbed.

Rents have slowly increased for the past 10 years to reach their current peak of $0.72 PSF NNN. 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. Industrial real estate will remain in high demand, especially densely populated infill industrial sites.