Vacancy Falls Due to Rising Leasing Activity

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 fell 20 basis points to 1.2% and remains near historic lows. Vacancy was tightest in the LAX/El Segundo/Hawthorne submarket at 0.7% and highest in the Torrance market at 2.5%. Industrial demand reported positive 473,700 square feet of net absorption this quarter due to several large leases. Sales and leasing activity totaled 2,197,800 square feet this quarter. This was broken down into five sales (123,000 square feet) and 38 leases (2,074,800 square feet).

Average asking rents increased $0.01 to $0.83 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 147,100 square feet in a single new project. > Only 193,400 square feet of space remains under construction, an incredibly small amount for a 214.6-million-square-foot industrial market. > Development is exceedingly difficult in the South Bay, where raw land, if available, sells for a premium. 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:

  • Vacancy decreased 20 basis points to 1.2% as several larger leases occurred this quarter.

  • New space totaling 147,100 square feet was brought to market this quarter, and 193,400 square feet is currently under construction and expected to be delivered in the next 12 months.

  • Net absorption recorded positive 473,700 square feet this quarter.

  • Industrial rents increased $0.01 over the quarter to $0.83 per square foot (PSF) triple net (NNN). Rents increased 5.1% over the last 12 months and are at their highest recorded point.

  • Sales and leasing activity totaled 2,197,800 square feet, which breaks down into five sales (123,000 square feet) and 38 leases (2,074,800 square feet).

Outlook:

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 flat vacancy rates as tight market conditions limit future declines. 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 will remain in high demand, especially densely populated infill industrial sites.