MID-CITIES – Slowdown in Development Brings Jump in Lease Rates

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After a record 1999, the industrial market in the Mid-Cities showed no signs of softening in the first quarter. But because fewer new developments are coming onto the market, brokers expect lease rates to start rising faster.

The average monthly asking lease rate in the third quarter was 50 cents per square foot, up from 44 cents a year ago. The average vacancy rate stood at 6.3 percent, according to Grubb & Ellis Co., compared to 6.5 percent at year-end 1999 and 6.0 percent in the year-ago quarter.

The slight uptick in the vacancy rate from a year ago can be attributed to the large volume of new construction last year. But that activity is now slowing down.

“We don’t have the velocity right now that we’ve had for the last 12 to 18 months,” said Jim McFadden, vice president with Grubb & Ellis. “There is still a lot of activity and demand is very high, but we’re starting to see fewer new developments and that’s going to drive up prices.”

According to McFadden, demand is growing for modern, medium-sized spaces of between 30,000 and 60,000 square feet, as many distributors and manufacturers are outgrowing their smaller facilities. However, most of the space that is available currently tends to be older, smaller buildings of less than 20,000 square feet.

In addition, there continues to be very high demand for so-called “big-box” developments, of 100,000 square feet and up.

One of the largest and most successful new developments in the Mid-Cities, the Golden Springs Business Center in Santa Fe Springs, has been pre-leasing huge chunks of space to distribution and warehousing operations that are looking for state-of-the-art industrial facilities close to the freeways between Orange and Los Angeles counties.

Recently, two new tenants signed on, at a combined lease value of $6.5 million, for space at a new, 284,461-square-foot speculative building at Golden Springs.

Electronics distributor Nelson & Associates leased 116,027 square feet and toy manufacturer Playmates Toys will be occupying 82,429 square feet, which includes 15,000 square feet of office and showroom space.

The new building is part of phase two of Golden Springs, located at the 256-acre site of the former Golden West refinery, which was owned by Thrifty Oil Co. At this point, 520,000 square feet of phase two has been completed, said Clyde Stauff, senior vice president with Colliers Seeley, who represents the landlord, Golden Springs Development Co. An additional 360,000 square feet is still under construction and slated for completion by June.

“We leased 1 million square feet last year, and we expect to lease another 1 million this year,” said Stauff. “We have enough space to build 5 million square feet of industrial space altogether if demand is there.”

Given the shortage of available space in the market, new development in the Mid-Cities has focused on converting old oil facilities into new industrial uses. Besides Golden Springs, one of the few other major projects is Heritage Springs Business Park, which is being built by Trammell Crow Co. at the site of a former Unocal Corp. facility.

Although the 10-building, 550,000-square-foot business park is still six months away from completion, negotiations to pre-sell or pre-lease the buildings are going well, according Vice President Tim Howard with Trammell Crow.

“I’m in the process of closing four deals,” said Howard. “There’s a great amount of interest, particularly from people who are looking for good freeway access.”

Unlike Golden Springs, Heritage Springs is not comprised of big-box distribution facilities, but it is aimed at smaller, entrepreneurial businesses, which combine manufacturing, distribution, and office operations under one roof.

Farther south, in La Mirada, Chevron Corp. is close to selling a 20-acre site to a yet-undisclosed developer, said Stephen Batcheller, first vice president with CB Richard Ellis.

“The deal is in escrow now and should close mid-June,” said Batcheller. “There are several plans for developing the site. One is for a 500,000-square-foot facility, another is for three smaller buildings.”

Elsewhere in the Mid-Cities, the Ezralow Co. is looking at a major retail and industrial development project in Downey, at the former Rockwell International Space Division site.

According to President Bryan Ezralow, the company has a six-month, exclusive agreement with the city to line up major tenants for the 120-acre site. Once a roster of tenants has been assembled, construction is expected to commence. Plans for the site include half a million square feet of retail space, more than 1 million square feet of office and high-tech R & D; space, and movie production facilities at the existing 1 million-square-foot hangar, which was used to build airplanes.

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