Even with new projects making more space available and easing vacancy rates slightly, the chronically tight market for industrial property in the San Gabriel Valley began to push lease rates upward.
The vacancy rate for industrial space was 1.5 percent in the first three months of the year, compared with 1.2 percent in the prior quarter but well below the 2.4 percent rate of a year ago, according to Grubb & Ellis Co.
First quarter average asking rents were flat at 48 cents triple net (excluding taxes, insurance and maintenance) and 4 cents higher than a year ago, consistent with the scarcity of space and high demand.
"We're there now, at the point where rents have gone up," said Jim Center, senior vice president at Grubb & Ellis. "My projections are that we'll see industrial rental rates in the San Gabriel Valley go up by the end of the year (another) 10 percent to 15 percent."
The short supply of developable land impacted the overall fourth quarter sales and leasing activity. Transactions in the region totaled 973,080 square feet, down from 1.7 million square feet in the fourth quarter and 1.9 million square feet a year ago.
The short supply also was reflected in the net absorption rate the amount of space taken off the market by new leases which fell to 104,113 square feet from 686,473 square feet in the previous three months.
Still, the region's inventory grew by nearly a million square feet, with the completion in the first quarter of three buildings at Gateway Pointe in Whittier, a park being developed by the Carpenters Pension Trust.
The project, originally slated for completion in November, helped push the vacancy rate up, but rents for new space are significantly higher than the market, again signaling higher rental rates on the horizon.
The biggest deals were at Majestic Realty Co.'s large business parks Crossroads, Fairway and Grand Crossing that are served by rail and all located in the City of Industry.
At Grand Crossing in the eastern outskirts of the valley, Home Depot USA Inc. signed a five-year lease for a 650,000-square-foot warehouse and distribution space. The building is still under construction and should be completed by the end of the year. The lease was for undisclosed terms.
Majestic also broke ground on a 350,000-square-foot building at the park.
Golden State Foods, a primary distributor for McDonald's Corp. is taking 270,000 square feet of the space for 10 years at a total consideration of $10 million.
And at the company's Fullerton Industrial Park in Industry, New Egg Technology signed a 40-month lease for 200,000 square feet of warehouse distribution and office space. An online seller and distributor of computers and PC components, the company paid 42 cents per square foot.
Brokers also noted that rents were being pushed up by a shortage of construction materials, notably concrete and steel, due to the extended building boom in China.
"Construction costs are up 20 percent to 25 percent higher for all new projects, so rents have to be higher," said Kent Valley, a senior vice president at Majestic. "We've made deals in the low 30s (cents per square foot) but the construction costs means we're now looking at the mid-30s."
Also driving up the price of some deals were the specialized requirements of tenants who need more than standard office space.
Vistar/VSA Corp. leased 245,000 square feet of food storage and distribution space at the Fairwest Industrial Park in Industry. The Colorado company distributes frozen pizzas, coffee and other concessions and needed 100,000 square feet of refrigerated space, pushing up the lease rate to 51 cents a square foot, well above market rate, said Marc DiGennaro, a senior vice president at Lee & Associates, which represented the company.
Brokers also reported a continued interest among tenants to purchase properties before rising interest rates made the deals too expensive to pencil out.
"I think when interest reaches 7.5 percent to 8 percent, you'll start to see a slowdown in purchasing," Valley said.
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