Economic uncertainty and gasoline prices continue to weigh on consumer confidence and spending, and many businesses are reacting to this by delaying significant spending and putting relocations and building expansions on hold.
Today, maintaining cash and focusing on immediate business needs are more important than buying a building or expanding into a more efficient warehouse. Combine this reality with a less than 2% vacancy rate, and the result is a 33% decline in leases and sales in the first quarter as compared to the same period a year earlier.
Total activity in terms of square footage leased or purchased by users slowed significantly in the Mid-Counties market during the first quarter. In fact, the 839,376 square feet logged was down 51% from the first quarter of 2007. At this pace, annual absorption will be at its lowest since 1991.
There was only one transaction of 100,000 square feet or greater, and 25 of the 29 transactions were 40,000 square feet or less, which is why the absorption numbers were so low.
The continued decrease in transactions may also be attributed to the lack of quality space available on the market and the limited amount of development under way or in the pipeline.
In this recessionary environment, most tenants are reluctant to incur the costs associated with moving and are more inclined to renew their current leases, even if their rents are significantly increased.
To date, most landlords have weathered this downturn favorably. The slow market has created a limited supply of available space, which gives tenants few alternatives to relocating and allows landlords to charge higher renewal rates. This lack of supply is also bolstering landlords’ confidence to push rates.
Notably in the first quarter, TA Chen leased 92,398 square feet at the Golden Springs Business Center in Santa Fe Springs at a record rate of 72 cents per square foot per month on a triple-net basis. The impact of the downturn on value has been evident in effective lease rates, as free rent has increased to offset tenants’ moving expenses.
The availability and vacancy rates are rising but remain at historic low levels. In the first quarter, the Mid-Counties saw a slight increase from the 1.1% vacancy of the fourth quarter to 1.7%. The availability rate also increased from the previous quarter’s 4% to 4.6%.
The increase in vacancy rates mostly was driven by buildings smaller than 100,000 square feet coming on the market. This bodes well for future activity because a majority of the activity in the Mid-Counties occurs in this size range. This limited supply will continue to support values in both sale prices and lease rates.
Realistically, as container shipments at the ports of Los Angeles and Long Beach continues to decrease and consumer confidence continues to fall, we must prepare for a continued slowdown in demand.
Further, recessionary fears coupled with an upcoming presidential election will provide ample justification for many businesses to “wait” on the sideline until the economic issues are worked out. While deals throughout the Los Angeles basin may continue to decline throughout the balance of the year, the Mid-Counties will continue to be ahead of the competition.
Given its limited supply and infill opportunities, the Mid-Counties has a competitive advantage over outlying markets as businesses consider consolidating into this central location that has immediate access to the ports and a large client base.
Deierling is a senior associate in South Bay office of CB Richard Ellis Group Inc.
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