By RICHARD McGEAGH
The Mid-Counties industrial market is strategically situated at the border between Los Angeles and Orange counties.
The cities within Orange County are Buena Park, Cypress, La Palma and Los Alamitos, listed in descending order by the size of their industrial base.
The cities within Los Angeles County include Santa Fe Springs, Cerritos, La Mirada, Paramount, Downey, Whittier, Norwalk, Lakewood, Bellflower and Artesia.
Amid the global and national economic turmoil that started in the third quarter, the industrial real estate market in the Mid-Counties area has been relatively tranquil.
The tornado of the credit crisis and its subsequent economic fallout has not devastated this area, which is evident by no major plant closures or massive layoffs. For this we must be thankful. But we are not entirely immune from the effects of the global economic crisis.
The crisis and its uncertainty are inhibiting real estate decision makers from moving forward with expansion plans. “We are on hold” has become the most common phrase in our business.
As a result, leasing and sales activity in the third quarter was down by most measures. Gross activity fell to more than 1 million square feet, which was down 14% from the second quarter and off 44% from the third quarter of 2007.
Buildings larger than 100,000 square feet saw the greatest decline in activity with just a 128,000-square-foot, two-year sublease being recorded versus the third quarter of 2007, with 846,232 square feet absorbed in four leases. Activity for buildings less than 100,000 square feet was off 13% in the same year-to-year comparison. Absorption also remained negative at 478,946 square feet, yet it improved from the 525,694 square feet of negative absorption in the second quarter. This is well off the 318,353 square feet taken during the third quarter of 2007.
Year-to-date overall gross activity is down 36.3%.
Transactions also were off, but not at too severe a degree, which underscores the weakness in the market for larger buildings. In the third quarter, there were 30 leases and sales compared to 36 in the second quarter and 38 in the third quarter of 2007. For the nine months through September, there have been 95 transactions as compared to 118 after three quarters in 2007, a 19.5% decline.
Rising Supply
As demand has declined, supply has risen. At the end of the 2007 third quarter, the availability rate stood at an all-time record low of 3.4%. Since that mark, the availability rate has increased 52.9% to 5.2% today. Similarly, the actual vacancy rate has risen 56.3% to 2.5% from 1.6%. The percentage increase is significant; but these measures of supply are relatively low.
The limited supply of available space has provided support to lease rates. As a matter of fact, the average asking triple net lease rate has increased 6.56% from the past year from 61 cents per square foot a month in the third quarter of 2007 to 65 cents per square foot a month a year later.
Effective lease rates on new leases have been hit, however, as concessions in the form of initial free rent, tenant improvements and broker incentives have increased. Renewal rates on the other hand are healthy and in many instances still reflective of a double digit increase over the rent in place.
Many renewals today are shorter term in the one to three year range as tenants’ expansion plans are put on hold and landlords are willing to accommodate them to ride out the storm.
Looking ahead, we anticipate choppy demand in the coming months as our global and national economies work through the ill effects of the credit crisis. Looking into 2009, we could see an increase in demand. As the economic bailout package takes effect and a new president is inaugurated into office, the uncertainty being felt today may be alleviated.
The expansion plans that are “on hold” today may very well come rushing to market next year. This expected demand in the face of relatively limited supply will lead to significant increases in effective lease rates.
McGeagh is a senior vice president in the South Bay office of CB Richard Ellis Group Inc.
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