Even as more new developments pour into the heated Mid-Cities industrial market, brokers report that buying and leasing activity is starting to slow.
The lower level of activity is reflected in the second-quarter statistics, with the industrial vacancy rate in the Mid-Cities inching up to 7.8 percent from 6.9 percent in the first quarter, according to Grubb & Ellis Co. A year ago, the vacancy rate stood at 8.1 percent.
The average industrial leasing rate, at 50 cents per square foot per month, was unchanged from the first quarter and up from the second quarter of 1999, when it averaged 45 cents per square foot.
The large volume of new construction coming on line during the quarter is the key reason for the uptick in vacancy, industrial brokers said. Still, brokers are noticing that the torrid pace at which new product was being absorbed last year has been replaced with a more measured level of activity.
"Compared to where it's been, it has definitely slowed down a bit," said Jim McFadden, a vice president with Grubb & Ellis. "Instead of seeing 15 or so very interested parties for every new building, you may now see just five. So the market is still pretty volatile, but the volatility is not as deep as it was a year ago."
Higher interest rates and concerns about an economic slowdown have made business people more conservative in their expansion plans, said McFadden, while rising lease rates have made them more reluctant to gobble up new space.
Even so, industrial developers are not exactly worried about whether or not their new business parks will fill up.
"We're getting close to being 60 percent committed," said Tim Howard, a vice president with Trammell Crow Co., which is developing the Heritage Springs Business Park in Santa Fe Springs. "It may not be as crazed as it was last year, but demand is still there and we're seeing a good level of activity."
The 10-building, 550,000-square-foot industrial park at the site of a former Unocal facility is slated for completion this fall.
Centered around Santa Fe Springs, the Mid-Cities industrial market caters predominantly to distribution and logistics companies that look for large, modern warehouse spaces close to the freeways between Los Angeles and Orange County.
Spurred by the ever-increasing volume of international trade passing through Los Angeles, demand for new distribution and warehousing facilities has grown fast over the last few years, and entrepreneurial developers have responded by converting unused oil fields and other facilities into industrial parks.
The largest new development in Santa Fe Springs is the Golden Springs Business Center at the site of the former Golden West refinery. The office park, which is designed to ultimately contain up to 5 million square feet of space, has had no problems finding takers for the space that has come on line so far this year.
In May, Nelson & Associates, an electronics distributor, leased 120,000 square feet at the second phase of Golden Springs, and toy distributor Playmates Toys took 83,000 square feet.
According to Steve Calhoun, a senior vice president with Colliers Seeley, two new buildings at Golden Springs were completed last month, measuring 290,000 square feet and 204,000 square feet respectively, and a third one is under construction that will add an additional 306,000 square feet.
"I'm working on some deals right now for the new buildings, and we should be closing in the next couple of weeks," said Calhoun. "There's some consensus that things are slowing down, but we're still seeing good demand across the board, from 20,000 square feet up to 100,000."
In spite of the many new developments coming down the pipeline, there's little concern about speculative overbuilding in the area, given that there is not much available land so supply will remain constrained in the long run.
The low vacancy rates and the steadily climbing lease rates in the Mid-Cities industrial market have also drawn the attention of institutional investors. In the second quarter alone, 2.7 million square feet of industrial property changed hands, bringing the total for the year to date to 5.5 million square feet.
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