Asking Rates Hit All Time High 

Key Takeaways:

  •  Asking rents have increased $0.02 per square foot (PSF) triple net (NNN) to $0.72 PSF NNN. This is a record rate for the Greater Los Angeles Basin. 
  • Construction completions were below average this quarter as only 3,131,500 square feet was added to the base. There remains 29,540,800 square feet under construction and we will likely see a large uptick in construction completions in the following quarter. 
  • Vacancy fell 20 basis points to 2.1% which is the lowest recorded rate reported for the region. Vacancy is likely to rebound next quarter as new vacant buildings are added to the industrial base.
  • Net absorption recorded only 4,760,600 square feet. Low vacancy and limited new construction has hindered positive net absorption this quarter.

The Los Angeles Basin industrial market is the largest in the United States, totaling more than 1.59 billion square feet. It also has some of the highest asking rental rates, as well as one of the lowest vacancy rates, of any market in the nation. Imports at the twin ports of Los Angeles and Long Beach, which handle roughly 40% of all imports into the country, continue to be a major industrial driver for the region. In addition, the region is the largest manufacturing center in the United States, with more manufacturing jobs than the entire state of Illinois.

Losing streak continues for the Central Los Angeles marketplace as space givebacks continue with negative net absorption totaling 292,200 square feet for the quarter. This led to the vacancy rate rising by 10 basis points to end at 1.7%. Several projects totaling 221,200 square feet finished construction this quarter. Construction activity remains subdued with only a single 118,700 square foot project breaking ground this quarter. Despite rising vacancy rates over the past three quarters, space remains scarce in the Greater Central Los Angeles market, which has few development options for tenants looking to expand.

Space givebacks this quarter totaled -716,700 square feet as the vacancy rate rose 30 basis points to end at 1.5%. Future quarters are likely to see flat or slightly rising vacancy rates as high rents force tenants from marginal industrial spaces. Tight market conditions have led to a building boom for industrial product in the South Bay. Future developments will likely require greater scrutiny on the part of developers as the remaining obsolete and under-utilized parcels often come with environmental risks inherent in infill development. Developers must factor this environmental cleanup cost along with steeply rising land sales prices when considering new projects in the South Bay.

There were no construction completions this quarter in San Fernando Valley and Ventura County, although several new projects have broke ground this quarter to move construction activity to 824,700 square feet. Asking rental rates increased $0.02 per square foot (PSF) triple net (NNN) to end the quarter at $0.73 PSF NNN. Rents remain at an all time high and have surpassed the previous peak of $0.68 PSF NNN seen in 2007. As industrial vacancy rates are at historic lows, industrial users seeking larger spaces are having to go further north into neighboring Kern County and particularly, the Tejon Ranch Commerce Center.

This quarter, a total of 524,600 square feet of new industrial space was brought to market in San Gabriel Valley. Much of this space was fully leased or sold prior to completion. 754,600 square feet of space remains under construction and several planned projects are ready to break ground in future quarters. San Gabriel Valley remains one of the few industrial markets with prospects of future construction activity.

There are currently no buildings under construction in Mid-Counties and few planned projects on the horizon. Tight market conditions are expected to persist as developable land remains difficult to find and very expensive.

The Orange County industrial market closed the third quarter with net absorption recording negative movement at -174,400 square feet. Although demand was negative for the quarter, market conditions are expected to continue to tighten. Industrial product continues to deplete as many properties are being sold for multifamily redevelopment or creative office space conversion. This is especially true for the industrial inventory located in the Irvine and Newport Beach market areas, with demand outweighing supply.

Construction completions were 2,161,700 square feet this quarter in Inland Empire, roughly half the average of a more typical quarter. Limited completions this quarter have led to ongoing construction totaling 24,989,600 square feet. Of this amount, roughly 10 million square feet is scheduled to be delivered in the next quarter. Planned and entitled projects total over 50 million square feet in the Inland Empire controlled by a limited number of major developers. We should see a controlled flow of new projects breaking ground in upcoming quarters as these institutional developers seek to limit and control their exposure to risk. Much-needed construction will be brought to the market in future quarters. This new supply is likely to be quickly absorbed by growing companies pushed out of neighboring infill markets.