Staff Reporter

With almost a billion square feet of space and vacancy rates of 3 percent or less in places, Los Angeles County's industrial real estate market is both massive and extremely tight.

"This is the best market I've seen in 20 years. The market's very active and rents are moving up," said Terry Reitz, a senior vice president at Grubb & Ellis Co.

Overall industrial vacancy in the county stood at 4.5 percent at the end of the second quarter, down from 8.3 percent a year earlier, according to Cushman & Wakefield Inc. The South Bay's vacancy rate is at its lowest point in more than a decade, and both the San Fernando Valley and San Gabriel Valley are at record lows, according to Grubb & Ellis' Mid-Year Forecast.

"At this point, there's very little inventory," said Bob Crenshaw, a senior vice president at Grubb & Ellis. "It's a landlord-owners market now."

That's in stark contrast to the early 1990s, when developer Charles Lyons III remembers "we had more than one guy wanting to get out of his lease."

Today's industrial strength has spurred a construction frenzy 7.9 million square feet in the works, up from 4.2 million at this time last year, according to Cushman & Wakefield. While that near-doubling of new construction may seem like a huge amount to absorb, most industry experts said it will be swiftly leased.

"Demand definitely is outpacing supply," said Darla Longo, senior vice president at CB Richard Ellis. "We don't have an overbuilt situation. The market is very steady with good solid demand in all submarkets, and it's going to continue to stay strong."

Indeed, the new construction, while huge in terms of square footage, represents less than 1 percent of the county's total inventory. The shortage of land has been a "self-regulating mechanism," Reitz said.

Due to the shortage of developable land, a lot of future construction is occurring on recycled properties, such as the former General Motors assembly plant in Van Nuys.

The level of construction has gotten so intense so quickly that it has resulted in a tight labor pool.

"There is truly a shortage of high-quality purveyors and vendors and artisans because they're all busy. To get crews you want, you have to pay extra," said Kim Snyder, director of development for Insignia/ESG. Overall building costs for top-tier contractors have increased by 20 percent, he said.

Snyder said he has noticed a slight ebb in demand for space, although he still sees a lot of interest in projects before they're completed.

For example, Koll Development Co. showed its faith in the market by undertaking the largest industrial project the City of Industry has seen since the early '90s, the 1.4 million-square-foot Plantation Business Center. As of last week, only a month after construction began, more than half of the speculative project's space had been preleased.

"I don't think we expected the type of response we had so early in the game," said Keith Ross, a Koll senior vice president.

There's no single reason behind the demand. Imports from Asian countries are up and consequently, warehouses in the South Bay are getting filled. Other factors include a robust domestic economy at least for now low interest rates and a growing Southern California population.

Companies leasing industrial space today span the gamut of industries apparel, entertainment, technology, retail, ethnic foods and international trade. Technology, entertainment and international trade, in particular, have taken off.

Each of L.A.'s industrial areas has its own dynamics.

The Central market, which encompasses downtown and communities to the immediate south and east, has vacancies no higher than 5 percent, according to Cushman & Wakefield. The main attraction of downtown where buildings are older and less efficient is its central location, said Dwight Hotchkiss, associate director of Cushman & Wakefield's industrial group. Toy importers, general merchandisers, food distributors and garment operations are prominently represented there.

There is little speculative development in the Central market because land prices are higher, making for a very tight market, Hotchkiss said.

"There's a severe shortage of buildings for sale," he said.

Some downtown distribution and light manufacturing operations have moved south to the Broadway-Rosecrans area because of congestion and a desire for newer facilities, said William Goodglick, president of the Goodglick Co.

In the Mid-Cities market where big warehousers of such goods as pet and garden supplies and some assembly operations are located demand has outpaced supply. But that crunch is easing, with 2 million square feet of new space being added to that market this year.

Both the Mid-Cities and South Bay markets are benefiting from a surge of inexpensive Asian imports coming into L.A.'s seaports and LAX. Big users of industrial space in those markets are air cargo and freight-forwarding companies. The LAX/El Segundo submarket is especially tight, with a vacancy rate of 2.5 percent.

The Culver City/Marina del Rey/Venice submarket, also tight, is considerably different driven largely by the entertainment industry, including post-production and communications firms, Goodglick said.

The San Gabriel Valley market, traditionally the most stable and solid industrial area in the county, continued to see low vacancies, the highest rents ever and abundant new construction. The largest projects are the 1.4 million-square-foot Plantation Business Center and the 112,000-square-foot Industry Business Center.

"Today, it's considered an infill market, not an eastern opportunity," Longo said of the San Gabriel Valley.

The Northern market, which encompasses the San Fernando Valley, Santa Clarita Valley and portions of Ventura County, had a vacancy rate of 4 percent at mid-year and currently has more than 3 million square feet of new space under construction and scheduled for completion by year end. Light manufacturing and technology companies are among the most prevalent industrial users on the west side of the Valley, with heavier manufacturing to the east.

Along with tightening vacancy rates, industrial rents countywide have appreciated from an average annual asking rate of $4.95 per square foot a year ago to $5.12 today.

"In all of L.A. County, we're going to continue to see rents escalate. There's going to be steady growth," Longo said.

What exactly do industrial users want for their money?

Crenshaw said "big-box" space is where the action is 80,000 square feet and bigger. State-of-the-art buildings feature new sprinkler systems that allow goods to be piled higher, heavy-duty power capabilities and 30-foot-high ceilings.

But developer Lyons, owner of Fu-Lyons Associates, said there's plenty of demand for buildings in the 10,000- to 30,000-square-foot range, which his company focuses on leasing to "mom-and-pop entrepreneurs." Out of Fu-Lyons' 1.6 million square feet of industrial space in Paramount, Bellflower, South Gate, Downey and Cerritos, only 14,000 square feet of space is vacant.

"It seems like we have enough people in the parks that need more space, so when it's available, it never hits the market," he said.

Some industry observers doubt whether the market can continue its torrid pace.

"It's questionable can the market maintain this level of absorption?" Snyder said. "We'll have an influx of second-generation space available" as tenants move out of older buildings and into new ones.

Reitz said rent increases will slow in the next six to 12 months, which he sees as a positive, since 7 percent to 8 percent annual increases are not sustainable.

Other factors that point to a possible slowdown include the weakness of the yen, which has curtailed expansion in the technology sector, a slowdown in entertainment-industry growth, the fact that most major retailers have already secured new warehouses, and slower manufacturing growth, Reitz said.

"It would be healthy if it slowed down," he said. "I want growth to be long term."

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