By BOB HOWARD
Old industrial space is gradually making way for the new in the Mid-Cities market.
"There is a limited supply of land, so we're starting to see older facilities being knocked down for new projects," said Jim McFadden, an industrial broker with Grubb & Ellis Co.
McFadden said developers are willing to start projects that only break even or make marginal profits because they believe they will fare better later on when rents rise.
"There is anticipation that rents are going to continue to spike up and that even if a project doesn't pencil out today--the costs are justifiable based on future rent increases," McFadden said.
Cliff Fincher, an industrial broker with Lee & Associates, said at least 1.3 million square feet of new industrial space is under construction in the Mid-Cities market, including more than 990,000 square feet in the city of Santa Fe Springs and 450,000 in other cities.
The Mid-Cities market, also known as the Mid-Counties market, includes the Los Angeles County cities of Santa Fe Springs, Paramount, Bellflower, Whittier, Norwalk, La Mirada, Artesia, Downey and Cerritos, along with the Orange County cities of Cypress, Los Alamitos and La Palma.
Despite the absence of any huge sales or leases during the first quarter, many deals are currently under negotiation. "This market is definitely still hot," Fincher said.
One indication of that strength, he said, was the first-quarter sale of a 72,281-square-foot building at 8190 Byron Road in Whittier that is vacant.
Fincher said the buyer, The Carson Co., bought the property as an investment despite the vacancy because investors believe demand will quickly fill most of the industrial space.
Edward Smith, a senior associate at Matlow-Kennedy Commercial Real Estate Services, said demand for newer space was illustrated in a recently completed study in which he found that 29 percent of the vacant industrial buildings in the market were built in the 1960s.
Smith said the age of the buildings is important because the biggest demand among industrial tenants today is for modern buildings with higher ceilings, more space for truck loading and unloading, and improved fire sprinkler systems that make buildings safer and reduce insurance costs.
Older buildings are more likely to be "functionally obsolete," Smith said, meaning they are likely to remain vacant despite the growing demand for industrial space.
Smith's study showed that only 4 percent of the vacant space in the Mid-Cities market was built in the 1990s an indication that newer space isn't likely to remain vacant for long.
He said it also explains the spurt of speculative construction. The industrial vacancy rate, in the high teens several years ago, was 7.1 percent at the end of the first quarter, according to Grubb & Ellis Co.
Smith noted that the vacancy rate was actually about 0.8 of a percent higher in the first quarter this year than in the first quarter of 1996 the result, he said, of "many functionally obsolete buildings becoming available."
However, Smith pointed out that industrial brokers generally consider any vacancy rate under 10 percent to indicate a healthy market.
"It used to be price per square foot was all anybody talked about, but now the tenants are looking at price per cubic foot," Smith said, an indication that tenants are now concerned as much with how high a building is as well as how many square feet it covers.
"Some of the older buildings will get leased if the asking rate is low enough," Smith said. "What we're seeing is rates coming down on the substandard space while they're going up on the high-end buildings."
McFadden agreed. "There is some less than Class A property that is dragging the market down slightly, but the new product coming onto the market is being absorbed," he said.
McFadden said the activity in the industrial market "is still very strong among all three kinds of tenants--those who want to lease, those who want to buy buildings for their own use, and investors looking to buy buildings. It's just that no big deals were inked during the first quarter."
Pension funds and big institutional investors are "extremely interested" in buying industrial properties in the Mid-Cities market, McFadden said. He expects sales and leasing to remain strong in the market for the rest of the year and said a number of deals now under negotiation will be completed in the coming quarters.
Major Events in the Mid-Cities Market
- Newport Beach-based Western Realco finished construction of its 215,420-square-foot building at 11333 Greenstone Ave. in Santa Fe Springs. During construction, 105,270 square feet of the space was pre-leased to Redline Medical Supply, according to Vance Mape, a principal of Western Realco.
- The Carson Co. bought a 72,281-square-foot building at 8190 Byron Road in Whittier for $2.7 million from The Rippy Co. The building currently is vacant, according to broker Cliff Fincher of Lee & Associates, which is marketing the property.
- Developer Fu-Lyons Associates of Paramount assembled a 9-acre site on Firestone Boulevard at the 605 Freeway in Downey by purchasing 5.5 acres from Seattle-based P.W. Pipe and adding it to 3.5 acres already owned by Fu-Lyons. Chuck Lyons, a principal of the company, said Fu Lyons plans to build up to 200,000 square feet of industrial space at the site in buildings ranging from 8,000 to 35,000 square feet.
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