The Mid-Counties industrial sector posted an increase in gross absorption to 2.4 million square feet in the second quarter, following 1.6 million square feet in the first quarter.
Total gross absorption in the first half of the year is 4.1 million square feet, up 8.3% versus the 3.8 million square feet a year earlier. Projected annualized gross absorption of 8.2 million square feet would be the highest level since 9.3 million square feet in 2000.
Net absorption numbers also were encouraging, with 1 million square feet of positive net absorption coming on the heels of 644,633 square feet recorded in the first quarter. The first half’s total is nearly five times the 354,000 square feet of net absorption recorded a year earlier.
As a result of the strong activity, the overall availability rate for industrial space fell 50 basis points to 8.5%, compared to the first quarter, which was the highest availability rate since 1993.
While the availability rate is near a historical high in the Mid-Counties region, it’s still significantly less than the national average of about 12%.
The actual industrial vacancy rate in Mid-Counties decreased to 3.9% from 4.7% in the first quarter.
The availability rate for class A buildings fell slightly to 17.4%, versus 19% in the prior quarter. The actual vacancy rate for class A buildings also declined to 10.3% from 12.4%.
The decrease in supply of class A space can be attributed primarily to the sale of several new buildings that finished construction. The leasing market remains challenging for higher priced class A buildings, though many of these are enjoying a resurgence in activity.
The leasing market for buildings less than 40,000 square feet generally is quite active. But demand diminishes as the size increases.
Further, users in all size ranges continue to expect concessions. Some owners with continued concern over world politics and lack of confidence in the national economic recovery continue to be aggressive with tenant concessions and broker incentives to get the next deal.
Owners of well-located and functional buildings less than 40,000 square feet are holding off for higher coupon rates. Broker bonuses range from a vacation bonus to a full 5% fee to the procuring broker on the most challenged buildings.
Based on the strong absorption in the first half and current strong activity in the market, lease rates should turn in months ahead.
User demand remains very strong for buying properties, but the supply of existing available buildings for sale is extremely limited.
This is especially true for buildings that are less than 30,000 square feet.
Several new projects that are under construction or planned continue to see good activity at record prices. Many sale comps for such new buildings have broken the $90 per square foot barrier and quickly are approaching $100 per square foot.
Whether for investment opportunities or owner/user properties, a combination of historically low interest rates and flight from the equity markets has spurred heavy competition for functional industrial space.
Business and consumer confidence continues to grow as the national economic indicators become more favorable and corporations report better earnings. It’s expected that these companies will make more long-term lease commitments and opt for the Mid-Counties market because of its central location, functional industrial base and clean, safe environment.
Batcheller is a senior vice president in the Anaheim office of CB Richard Ellis Inc.
