Losing Streak Continues For Central Market
The Central Los Angeles industrial market is the oldest market in the Greater Los Angeles region, with a large proportion of older and functionally obsolete buildings. Many of these lower clearance buildings are located in the Central Los Angeles submarket, near downtown Los Angeles. Much of this space has been converted to residential, retail or office product. Industrial demand is heavily concentrated in the Vernon and Commerce submarkets, with food production and apparel manufacturing remaining the top industries.
The vacancy rate rose 10 basis points to 1.7% and the availability rate held steady at 4.4%. Vacancy remained tightest in the Vernon submarket at 1.6% and higher in the Commerce submarket at 1.9%. Industrial demand was negative for the quarter at 292,200 square feet and negative 667,200 square feet for the year. Sales and leasing activity totaled 3,329,800 square feet this quarter including 19 sales (866,000 square feet) and 72 leases (2,463,800 square feet).
Average asking rents rose $0.02 PSF to $0.69 PSF NNN, their highest recorded point and continue to rise. Sales prices and asking rents continue to rise as nontraditional industrial users move into industrial space in desirable areas. This is especially noticeable in the Central Los Angeles submarket, where asking rates are 25% higher for comparable industrial space in the Commerce and Vernon submarkets.
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. With only a few planned projects in the pipeline, land prices continued to increase to more than $2 million per acre. Development is exceedingly difficult in the downtown industrial core of the Central Los Angeles industrial submarket due to the encroachment of residential, retail and especially creative office development.
This quarter, ProLogis completed its acquisition of DCT Industrial in an 8.4 billion dollar stock-for-stock transaction. Many of the desirable Class A properties were located in Southern California, driving average sales prices for the quarter to $216 per square foot. Rising sales prices led to further compression of cap rates to 5.0%. No other property type has seen such continued compression in cap rates, especially at a time when 10 year treasury rates have increased over the past year by 70 bps.
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%.
Asking rental rates increased $0.02 per square foot (PSF) triple net (NNN) to $0.69 PSF NNN. Asking rents remain at their highest recorded point despite having only slightly increased over the past year. Much of the gain in asking rents was seen in the infill Central Los Angeles submarket, especially for smaller spaces.
Sales and leasing activity totaled 3,329,800 square feet, which breaks out into 19 sales (866,000 square feet) and 72 leases (3,329,800 square feet).
Only 118,700 square feet of space remains under construction, a very low number for a market with upwards of 248 million square feet.
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. With dwindling construction and tight market conditions, future quarters may see lower amounts of sales and lease activity. Rents will remain high by historical standards but appear to be stuck at their current rate. Marginal space that continues to linger on the market will put a strain on further increases to the average asking rate. Tenants who signed leases five years ago can expect their rent to increase roughly 20%-30% upon renewal.
Construction will remain subdued for the foreseeable future, limited to build-to-suit projects or creative rehabilitation of functionally challenged industrial sites. Investors remain attracted to the industrial sector due to continued shifts in consumer behavior and a growing economy. Southern California remains the premier industrial investment market due to low vacancy rates and continued rising rental rates.
Industrial users in the Central Los Angeles marketplace face an increasing number of headwinds, including higher labor costs, increased materials costs and increasing transportation costs on top of increased real estate costs. Add to this the impacts of tariffs on raw materials and export opportunities and we are likely to see increased negative net absorption for smaller and more regional industrial users who will be most impacted by growing market constraints.