New business migrated to the Mid-Counties industrial market that straddles the Orange-Los Angeles line in the fourth quarter, and existing business expanded, resulting in 1.9 million square feet of positive net absorption last year, the highest level in the market since 2005. It also marked the fourth consecutive year of positive net absorption. The market is seemingly out of available product as a result.
Levels of supply have decreased to all-time lows of 1.9% available and 0.9% vacant. The year-over-year gross activity no longer serves as a reflection of demand. Just 1.3 million square feet were absorbed during the quarter due to the low supply, down 47% year-over-year. Nearly 7.8 million square feet were absorbed last year in spite of an average available inventory of 3 million square feet. It was more evidence that the only restraint on gross activity is the severe lack of supply and that the dilemma will only become worse this year.
Prices Up
The year-over-year average asking lease rate increased 5.1%, and the average asking sale price rose 2.3%. The 2015 average triple-net effective lease rate for buildings 10,000 square feet and larger was 58 cents per square foot per month, up 7.8% from 54 cents triple-net in 2014. The appreciation is taking place without an influx of development or available class A product, so the jump in effective rates reflects longer lease terms with more rental increases and less free rent. The good news is that the values are still roughly 10% off the peak set in 2008.
The Mid-Counties market is starving for new product, but land is scarce in this in-fill market. Two large projects are about to break ground, and their timing appears to be optimum. Overton Moore Properties recently started work on an 8.9-acre site in La Mirada to construct a 199,588-square-foot building. Goodman Birtcher will break ground on the former Cenco (Powerine) Refinery to build 1.2 million square feet in three buildings constructed in three consecutive phases. Both projects are generating preleasing activity. Bridge Development in December closed on the 9.7-acre former Norwalk Dairy site in Santa Fe Springs at a record per-square-foot price in the market. It plans to construct three buildings totaling 231,731 square feet. Duke Realty is scheduled to close on the 21-acre Chevron site in La Mirada with plans to construct a 470,000-square-foot logistics building.
Investors continued to vie for product in this strategic market during the quarter, but supply was limited. IPT acquired a class A, 125,000-square-foot lease-back in Santa Fe Springs, from Mias, at an impressive price per square foot. Dedeaux Properties purchased the 121,328-square-foot (a total of eight buildings) industrial park in Santa Fe Springs from the Adaya Family Trust. LBA Realty closed on the 92,719-square-foot multitenant Shoemaker Business Park in Santa Fe Springs from TA Realty. Brookfield Logistics Properties acquired a 73,516-square-foot, class B building in Cerritos with a new five-year lease to Eminent Inc. Four investment sales in one quarter is evidence of healthy activity, but there remain more buyers than sellers.
Strong Points
The national economy is improving, and interest rates remain historically low. Confident occupants, investors and developers will continue to seek opportunity in the Mid-Counties market, with its central location in the Southern California basin, proximity to the Long Beach and Los Angeles ports, appealing housing options, strong labor base, and functional industrial base.
McGeagh is a senior vice president at CBRE.
