The Mid-Counties industrial market saw some life during the third quarter, suggesting the beginnings of a rebound from the worst recession since the Great Depression.
Although the economy is perceived to be in the initial stages of rebuilding, companies still are expected to aggressively reduce their unwanted, unsold goods before rebuilding their inventories, and thus adding industrial space.
In the third quarter, the Mid-Counties market ignited a spark and owners fueled the fire with aggressive concessions.
The result was a surge in activity with 1.6 million square feet of gross absorption, representing a 135% increase from the second quarter at 685,222 square feet, as well as a 50% increase in gross absorption from the 1.08 million square feet registered a year earlier.
This surge in third-quarter gross absorption puts 2009 on pace to beat 2008 numbers.
The number of transactions only increased slightly from the second quarter to the third quarter: 21 to 24 transactions.
Nearly 1.1 million square feet of the third quarter’s gross activity was due to six transactions larger than 100,000 square feet. Noteworthy deals include the Solaris Paper Inc. sublease of 274,088 square feet in Buena Park, the Empire Warehousing & Logistics lease of 234,763 square feet in Cypress, the VF Corp. (owner of Vans Inc.) expansion of 216,268 square feet in Santa Fe Springs, and the city of Buena Park’s acquisition of 101,000 square feet in Buena Park.
Negative Absorption
The Mid-Counties market continued to see negative net absorption during the third quarter—due to continued company consolidations—which tempered gross absorption statistics and the dramatic jump in activity.
But the negative 44,832 square feet of net absorption was a substantial improvement from the 944,261 square feet of negative absorption in the second quarter.
While vacancy rates remain unchanged from the second quarter at 4%, the availability rate increased to a historically high level for this submarket of 10.1%.
Prices continued to show predictable declines as the market attempted to stabilize and create a bottom.
During the third quarter, average asking lease rates fell about 5% from the previous quarter to 53 cents per square foot, while average asking sales prices remained unchanged at $115 per square foot.
Asking lease rates have declined almost 19% year-over-year and asking sales prices have declined 21% during the same period.
Actual deal values are even lower due to increased free rent and relocation concessions being offered to lure tenants.
In fact, the average lease rate for buildings greater than 10,000 square feet decreased 25% to 53 cents per square foot, per month year-to-date in 2009, as compared to the 64 cents in 2008.
Investment activity during the third quarter was limited to one notable closing: Prudential Financial Inc.’s sale of two facilities totaling 224,600 square feet at the Commerce Centre in Buena Park to Westcore Properties.
While employment and the commercial real estate market are expected to lag the balance of the anticipated economic recovery, the Mid-Counties submarket has been more resilient than many other industrial markets regionally as well as around the country. This is due to its central location in Southern California, diverse business and labor base and proximity to the ports of Los Angeles and Long Beach.
Chu is a first vice president in the South Bay office of CB Richard Ellis Group Inc.
