Construction Boom Continues Strong

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, continue 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 held steady at 1.3%. Vacancy remained tightest in the San Gabriel submarket at 0.8% and highest in the Foothill Freeway submarket at 1.9%. Industrial demand reported 350,200 square feet of positive net absorption due to fully occupied new construction. Sales and leasing activity totaled 2,383,800 square feet this quarter. Average asking rents increased $0.03 PSF NNN over the quarter to $0.75 PSF NNN. Despite hitting their highest point, asking rents will likely remain high as demand continues to outpace supply. Asking rents are highest ($0.79 PSF NNN) in the San Gabriel submarket and lowest in the Industry submarket ($0.74 PSF NNN).

Construction completions this quarter totaled 524,600 square feet in several small projects, most of which were fully leased or sold prior to completion. There remains 754,600 square feet of space under construction. Land remains at a premium, with  developable industrial land topping $1.5 million per acre. Rising industrial rents and limited availability will lead to higher land prices in future quarters. 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.

 

Key Takeaways:

  • This quarter a total of 524,600 SF of new industrial space was brought to market. 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.

  • Average asking lease rates increased $0.03 per square foot (PSF) triple net (NNN) over the quarter to end at $0.75 PSF NNN. This remains the highest level for asking rents in the San Gabriel Valley, as rents have been steadily rising for the past eight years.

  • Sales and leasing activity totaled 2,383,800 square feet, which breaks down into 19 sales (660,000 square feet) and 47 leases (1,723,800 square feet).

Outlook: 

 

Industrial development remains strong with larger industrial projects looming on the horizon. Rising rents and increasing tenant demand more than make up for the higher land and materials prices. The surge in rents has prompted many users to consider buying their properties and recently developed for sale product has been met with great success. 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 $0.75 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. 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.