Demand for real estate in the Mid-Counties industrial market has become a challenge to quantify with its historically low levels of inventory. Gross activity and net absorption were down significantly in the second quarter year-over-year, though availability and vacancy rates were, too.
The market is strategically situated at the border of Los Angeles and Orange counties.
Vacancy and availability rates continued to decline, ending the quarter at 0.7% and 2.9%, respectively. A better measure of demand in today’s environment may be to compare total gross activity with available supply. The former was at 1.4 million square feet at quarter’s end, and the latter was at nearly 2 million square feet, reflecting an absorption rate of 71%.
Three large-occupier transactions of over 100,000 square feet were the primary driver in gross activity: Kenko Freight Systems Inc. preleased 181,000 square feet from Golden Springs Development Co., eclipsing the 70-cents-per-square-foot triple-net barrier; Priority One Warehouse leased 121,344 square feet in Santa Fe Springs from Oltmans Construction Co. 110 days prior to the existing tenant’s scheduled vacancy; and Indio Products Inc. purchased 153,080 square feet in Whittier from Rexford Industrial Realty Inc. Large blocks of available space are now in very limited supply in the market. A few large building developments should be breaking ground in the third quarter, something that would help fill the void; however, all have preleasing activity.
The consistently strong demand for space in the Mid-Counties area over the past seven years and the resulting limited supply is pushing building and land values to record highs, and lease rates are rapidly approaching previous peaks.
The average asking sale price increased 11.7% year-over-year, ending the quarter at $148.25 per square foot, just pennies over the previous high of $148.16 per square foot set in the fourth quarter of 2007.
The average asking lease rate is up a more modest 4.9% year-over-year to 64 cents per square foot and also just pennies off the peak of 66 cents per square foot set in that same 2007 quarter. The year-over-year change in the triple-net effective rate for buildings 10,000 square feet and greater was more dramatic—a 15.6% increase from 55 cents per square foot in last year’s second quarter to 63 cents per square foot. The metric illustrates the dramatic reduction in lease concessions and rental increases over the term.
Momentum promises to propel Southern California and the Mid-Counties submarket to new highs as we move into the second half of the year with confidence in the national economy, the stock market hovering at an all-time high, and low interest rates.
The Mid-Counties market, with its central location in the Southern California basin and within close proximity to the Long Beach and Los Angeles ports, appealing housing options, strong labor base, and functional industrial base, always will be a strong option for tenants, investors and developers.
Research and analysis provided by CBRE Research
