Fully Leased Buildings Lead To Positive Demand

The Mid-Counties remains one of the tightest industrial markets in Southern California, with a low  vacancy rate of 1.2%. This has left very few options for firms looking to expand. With no new construction in the pipeline, tenants who need to be in this marketplace will pay a premium to move into space that meets their needs. The vacancy rate fell 20 basis points to 1.2% on increased leasing activity over the quarter. There was 445,200 square feet delivered to the market this quarter, all of which was fully leased, which had no impact on the vacancy rate. There is no current space under construction.

Net absorption was a positive 677,000 sf due to fully leased construction completions. Sales and leasing activity totaled 3,500,700 square feet which is significantly above average. Much of this was due to DAMCO / Maersk moving into 989,800 SF of space in Santa Fe Springs. Average asking rents increased $0.02 PSF NNN over the quarter to end at $0.77 PSF NNN, the current high water mark for asking rents for this market. Lack of new supply coupled with increased demand for buildings is putting upward pressure on asking rental rates. This will continue to make the Mid-Counties one of the more expensive markets in Los Angeles County.

New construction deliveries this quarter totaled 445,200 square feet in two projects, both which were fully leased. There is no space currently under construction in the Mid-Counties industrial market. Development opportunities continue to be scarce, and land prices for even marginal industrial parcels are seeing new highs. This quarter, ProLogis completed its acquisition of DCT Industrial in an $8.4 billion 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.

Key Takeaways:

  • 445,200 square feet of industrial buildings finished construction this quarter, all of which was preleased.
  • Due mostly to this newly delivered space, industrial absorption was a positive 677,000 square feet.
  • The vacancy rate fell 20 basis points to 1.2%. Quality industrial space remains scarce.
  • Sales and leasing activity totaled 3,500,700 square feet, which is the highest amount ever recorded since Colliers began tracking it. This was due to several large leases that were completed this quarter.
  • There are currently no buildings under construction and few planned projects on the horizon. Tight market conditions are expected to persist as developable land remains difficult to find and very expensive.

Outlook:

The Mid-Counties market remains a tight infill market with no space currently under construction. Industrial demand remains at record levels for Southern California with the Mid-Counties being one of the most sought after areas for distribution and last-mile industrial uses.

There is no construction activity on the horizon, further constraining industrial supply. Vacancy remains tight as the Mid-Counties market is one of the most sought after markets in Southern California. Absorption will likely be flat in future quarters as the lack of new supply will constrict tenants ability to expand. Rents are expected 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 significantly upon renewal. Increasing rental rates and sales prices, along with continued low vacancy rates, may lead to older buildings being demolished and redeveloped into new projects. 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.