The South Bay's booming ports and lack of land continued to fuel a run-up in industrial rents and property prices in the first quarter, with the region's hot office market also making it economical to convert industrial space to office uses.

The industrial vacancy rate in South Bay stood at 2.5 percent, down from 2.8 percent in the fourth-quarter of 2005 and unchanged from a year ago, according to data from Grubb & Ellis Co. Meanwhile, asking rents in the region have jumped to 65 cents from 53 cents a square foot in the last 12 months.

"We see rents continuing to rise because of the lack of land to build new product and also continued strong container counts through the ports of Los Angeles and Long Beach," said Jeff S. Morgan, senior vice-president at CB Richard Ellis Group Inc. "The best barometer for industrial land demand is a direct correlation to the number of containers passing through the ports."

In the first two months of this year, an increase of nearly 9 percent in container traffic through Long Beach has more than made up for a drop of less than 4 percent at the Los Angeles port, for a 2 percent overall gain.

At the same time, the net absorption rate in South Bay has more than tripled in the last year, according to Grubb & Ellis data. Current construction totals only 1 million square feet, or 5 percent of the total market.

"There is not a lot of construction due to lack of land," said John Lasiter, senior vice-president at Lee & Associates brokerage. "There are not a lot of sales, and people are having a hard time finding trades. They also look for the tax advantages, so they end up leasing."

In the last year, land prices in the South Bay have increased from the low $20s to the high $20s per square foot. For the future, Lasiter sees "the biggest story as land prices jumping to the low $30s" this year.

Meanwhile, the sale price for industrial space has elevated to more than $100 per square foot, a level Morgan called "beyond irrational exuberance." For example, Lasiter had a 71,000-square-foot building on the market at $95 per square foot with several willing buyers. "The 'wow factor' comes when you realize that a year and a half ago, that property would have sold for about $65 per square foot," he said.

Compounding the problem, Morgan said, has been that in the last 18 months more than 150 acres have been removed from the industrial land pool for redevelopment as retail, office or residential uses, or for schools.

Simultaneously, vacancy rates for office space in the South Bay market have dropped to 16.1 percent from 20.4 percent a year ago. With no new office space in the pipeline and demand continuing to build, developers have turned to conversions or even demolitions.

"It's economical to take down these obsolete buildings," Lasiter said. "It's all a function of land values."

When negotiating leases, tenants in South Bay focus on parking, container space, the ability to operate their business on a 24-7 basis and options to renew the lease, Morgan said.

For his part, Lasiter finds tenants concerned about rental increases. The current market gives landlords the negotiating advantage, resulting in rent increases as often as every two years, fewer free months, minimal tenant improvements and little to zero wiggle room on asking rates.

Tenants who balk at South Bay prices have few options. Other locations in Los Angeles County have minimally lower rentals, so companies looking for significant saving have to go to the Inland Empire, Lasiter said.

Some of the large lease deals in the area include American Port Services, a division of trucking firm Schneider National Corp., renewing 315,000 square feet from property owner AMB Property in Carson. Freight agent Imperial CFS expanded and relocated by leasing 298,000 square feet in Torrance from AMB. And Frontier Logistics Services, a supply chain management firm, leased 200,000 square foot from Watson Land Co. in Carson.

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