Southern California Industrial Market
ORANGE COUNTY
The Orange County industrial market showed positive signs in the second quarter as effects of the nation’s and area’s economic uncertainty remained minimal.
The positive net absorption seen this quarter was an improvement from the half million square feet of negative absorption posted in the previous quarter. Industrial leasing picked up slightly in the second quarter and should be expected to increase slowly as the year progresses.
Sale activity remains strong with little or no signs of slowing. Asking rents have increased slightly as expected due to increased leasing activity. The market should favor tenants in the short term (six months). The vacancy rate in Orange County was stable, versus the first quarter. Net absorption was positive 202,423 square feet, with negative absorption in South County and West County, and positive absorption in North County and the John Wayne Airport area.
The largest lease during the second quarter came from Cardinal Logistics, which leased 184,000 square feet in North County’s Fullerton.
Activity is coming largely from tenant relocations and direct leases as tenants have taken advantage of soft leasing conditions. Movement from larger tenants is slowly picking up, however, many are still waiting for the economy to show signs of strength, perhaps in the second half of the year.
Market Assessment
Net absorption was positive for both general industrial and research and development buildings in the second quarter. R & D; properties posted the largest gain in positive absorption with 612,910 square feet during the quarter.
North County was able to benefit from two large lease transactions, creating positive absorption for the second time since the third quarter of 2003. The airport area experienced positive absorption for the first time this year with the majority of activity coming in Tustin and Irvine.
About 64% of lease activity came from industrial buildings ranging from 30,000 to 70,000 square feet.
One major project that broke ground in the second quarter was Tustin Gateway Business Park, with 266,000 square feet set for completion in the fourth quarter of this year. Construction completions for the county will reach upward of 400,000 square feet by year-end.
Almost 80% of the planned industrial development in OC is in South County and is targeted at the owner/user sale market.
Challenges, Opportunities
Manufacturing companies in Orange County have been negatively affected by California State policies and regulations. Manufacturers across the state have worked to reduce their cost and improve their productivity, but often have found their efforts eroded by costs they can’t control, such as healthcare, excessive litigation, volatile energy prices and burdensome regulations.
The industrial sales arena is anticipated to remain active through 2004. The low cost of borrowing has the potential to generate long-term economic savings for companies buying buildings, rather than leasing.
However, the lack of quality buildings for sale is likely to continue to challenge potential buyers. In addition, strong demand is expected to sustain industrial pricing through the rest of the year.
INLAND EMPIRE
Steady demand has positioned the Inland Empire’s industrial market in a continued expansion mode. The vacancy rate declined 230 basis points to 5.6%, versus a year earlier. Monthly rental rates escalated and construction activity rose by 19%.
Leases made up 78% of user transactions during the quarter in which small buildings were the choice among tenants. Small businesses migrated from neighboring areas, including San Gabriel Valley, where the current vacancy rate was a tight 1.8%.
Commercial redevelopment of former Air Force bases continued at a fast pace. At AllianceCalifornia, Mattel finished construction of a 1.2 million-square-foot center, an air freight operator was signed and Pep Boys was added to the list of tenants. As land supplies become exhausted along the 10, 60 and 215 freeway corridors, expect activity to migrate to the high desert.
Market Assessment
Monthly rental rates rose 4 cents for warehouse space and 33 cents for R & D;/flex in the second quarter. Gross activity was down 8%.
Investors once again bought vacant buildings in expectation of anticipated leasing yields. Park Place in Rancho Cucamonga, an industrial park consisting of 16 free-standing buildings 9,477 to 29,935 square feet, completed construction; all were sold.
With big-box activity moving to the east, previously underutilized submarkets are garnering attention. To the northeast, Redlands had a resurgence in activity when Big Lots leased an existing 468,139-square-foot distribution center to support the company’s anticipated West Coast growth. The company will begin shipping merchandise in September.
For the quarter, the Redlands/San Bernardino region led absorption activity, suggesting the area’s once-prominent psychological barrier of entry has been shattered from commercial interests shifting eastward.
Challenges, Opportunities
As a logistics hub, the Inland Empire industrial market draws lifeblood from the movement of goods. This year, the number of containers handled at the ports of Long Beach and Los Angeles will reach 13.1 million 20-foot equivalent units, an increase of 11%.
In response, Union Pacific’s Colton rail station will hire more than 100 workers by August and Burlington Northern Santa Fe will add 1,600 employees to its national workforce of 36,500 to meet the demands of a recovering economy.
The Bush administration now has the authority to open the U.S. border to Mexican trucks. Historically, trucks hauled loads across the border where American transporters picked them up and carried them to their final destinations.
Soon, 34,000 Mexican trucks will be operating in the U.S.
LOS ANGELES COUNTY
This has proven to be a strong year for the industrial market in Los Angeles County, with net absorption totaling 5.1 million square feet at midyear and vacancy dipping to 2.9%. This is the lowest vacancy rate ever recorded in Los Angeles County.
Sales and leasing activity has been increasing since the fourth quarter of last year. More than 13 million square feet of activity was posted in the second quarter, an increase of 32% from the same three-month period a year ago.
Los Angeles County is one of the largest industrial markets in the country; however, the market continues to suffer from a shortage of developable land as well as buildings for sale.
Additionally, industrial land is being converted to non-industrial uses such as multi-family and retail. For example, the site formerly occupied by General Motors in Van Nuys has been largely converted to retail, with some new and smaller industrial space.
Despite the challenges, the Los Angeles County industrial market will generate increased leasing activity in the near term. Although the demand for buildings for sale will continue, the shortage of supply will force businesses to consider the leasing market. Rising interest rates will reinforce this trend.
As leasing picks up and the market becomes more competitive, landlords will cut back on concessions and increase lease rates. Developers, on the other hand, will continue to scour for land to build in the county.
Market Assessment
Los Angeles County has five industrial submarkets, each with different characteristics and performance profiles. During the second quarter, the South Bay generated the highest volume of sale and leasing activity in Los Angeles County followed by the San Gabriel Valley.
Compared to the second quarter of last year, leasing activity alone increased by more than 1.4 million square feet in the county. The largest lease transaction took place in the San Gabriel Valley. Coaster Company of America, a furniture manufacturer, took 500,000 square feet in Industry. The seven-year lease was signed at 39 cents per square foot per month.
During the second quarter, leasing activity comprised 83% of total activity in the San Gabriel Valley, a dramatic departure from the first quarter when user sales comprised 81% of the activity. Once again, the Industry area led market-wide activity in the San Gabriel Valley.
Forecast
Although many companies are seeking manufacturing cost savings overseas, the local industrial economy is on the right track. In June, economic activity in the manufacturing sector grew for the 13th consecutive month, while the overall economy grew for the 32nd consecutive month, according to the Institute for Supply Management report.
The institute’s purchasing managers’ index for June registered 61.1, well above the neutral reading of 50. The index has registered above 50 since June 2003.
As the national economy improves, Los Angeles County’s industrial market will gain more momentum during the second half of 2004 with leasing velocity increasing and vacancy declining even more.
Land prices should continue to rise due to supply constraints combined with growing demand. Development opportunities are strongest in downtown Los Angeles, South Bay and the Santa Clarita Valley, particularly for smaller industrial buildings in the 10,000 to 40,000-square-foot range.
Investors who currently own buildings may want to consider selling into this strong market. At the same time, now is a favorable time for tenants because landlords continue to offer low rates and good concessions.
Despite all the opportunities for investors and tenants in Los Angeles County, challenges remain. Land supply is limited, and in fact is declining as industrial space formerly occupied by manufacturers is being used for non-industrial uses such as multi-family and retail.
Some land formerly used for manufacturing has been recycled for warehousing, in large part due to the county’s significant role in international trade and also due to the migration of some manufacturers overseas. Even businesses choosing to manufacture their products overseas still need warehouses to store and ship their products.
