Contributing Reporter

An unmistakable note of caution is being heard in Mid-Cities real estate circles, despite the fact that rents are rising and vacancies are decreasing in an already tight market.

Brokers say that demand softened, if only slightly, in the third quarter, as potential buyers and tenants hear reports of global recession and predictions of a national economic slowdown.

"A lot of brokers are slowing down a little bit," said Peter Pistone, a Grubb & Ellis Co. broker. "Their activity has tailed off. But the demand is still there, and we're still dealing with a shortage of supply."

Indeed, Pistone has one client who needs a 150,000-square-foot manufacturing building in the Mid-Cities area, but can't find one.

"It's just there's some uncertainty in the air. Where we were getting three or four multiple offers, now we're getting two or three. Most companies seem pleased with where their business is now, but they're not sure about the next 12 or 18 months," Pistone said.

Other brokers echoed that assessment.

"The (real estate investment trusts) are having a hard time raising capital, so they're no longer an acquisition player," said David Bayle, a broker with Cushman & Wakefield Inc. "The scene has changed here in the last few months. We're kind of right in the middle of where we're not sure what's going to happen next, in terms of the economy."

The Mid-Cities submarket encompasses the smaller, industrial areas of southern Los Angeles County, and includes cities such as Norwalk, Santa Fe Springs and La Mirada. Its popularity with industrial tenants, and developers, stems from its proximity to population centers and to several freeways, as well as to the Los Angeles/Long Beach harbor complex.

Vacancy rates continued to drop during the quarter, and average rental rates rose slightly. Cushman & Wakefield pegs the direct industrial vacancy rate in the third quarter at 3.7 percent, down from 3.8 percent the previous quarter and 6.4 percent in the third quarter a year ago.

Average direct rental rates have been inching up about a penny a quarter for the last year, hitting 43 cents per square foot in the third quarter, according to Cushman & Wakefield.

"Do I think it's going to get pricier? Probably not, particularly because of the oversupply, especially in the big boxes (over 100,000 square feet) that are going to be hitting the market," said Bayle. "I think people are going to hold their rates firm."

Although most of the developable land in the Mid-Cities area is long gone, there are 24 of those "big boxes" cited by Bayle currently under construction, according to Cliff Fincher, senior vice-president with Lee & Associates.

Although a few of those buildings are in Orange County, the bulk are on the L.A. County side, and the latter can be had more cheaply. "The better deals are in Mid-Cities," Fincher said.

If rates do get much higher, companies will likely begin looking east to Inland Empire cities like Ontario, where cheaper rents can overcome the added transportation costs, said Bayle.

"I think overall, the activity is still as healthy as it's been historically for absorption," said broker Jim McFadden, also of Grubb & Ellis. But developers who were able two or three months ago to turn away some potential tenants for their projects under construction may want to rethink those offers, McFadden said.

Owners who previously wouldn't have considered dividing their buildings and leasing them out to two tenants instead of a single, large one should also think twice, he added.

"If there's a deal on the table with credible tenant on a divisible basis, they ought to think about it," McFadden said.

Among the notable transactions in the quarter, Ryder Logistics leased a 123,058-square-foot building in the Cerritos Distribution Center in a four-year deal.

In addition, Pistone of Grubb & Ellis represented Exhibit Enterprises of Michigan, a manufacturer of equipment for trade shows and exhibits, in the purchase of a 178,000-square-foot class-B building on John Street in Santa Fe Springs, from the Pasadena-based owner, KBC, a limited partnership. The sale price was $6.5 million, and the company will occupy two-thirds of the building.

King Moving and Storage leased a 54,000-square-foot concrete tilt-up with 30-foot clearances from Fremont Properties in La Mirada, said Fincher of Lee & Associates.

Major Events:

? Ryder Logistics leased a 123,058-square-foot building in the Cerritos Distribution Center in a four-year deal.

? Exhibit Enterprises bought a 178,000-square-foot class-B building on John Street in Santa Fe Springs from Pasadena-based KBC for $6.5 million.

? King Moving and Storage leased a 54,000-square-foot building from Fremont Properties in La Mirada.

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