Business from the Los Angeles and Long Beach ports continued to push activity in the Mid-Cities industrial market in the fourth quarter, driving the vacancy rate close to the lows seen during the technology boom.
Leases and sales in the sprawling multiple-city region, which includes Santa Fe Springs, La Mirada, Buena Park, Cerritos, Norwalk and Downey, totaled 3.2 million in the October-December period, according to Grubb & Ellis Co. That was 63 percent higher than the nearly 2 million bought and leased in the same quarter a year ago.
"Overall, the market is very healthy. In 2005, we were experiencing strong leasing and sales activity throughout the whole year," said John Biven, first vice president at CB Richard Ellis Group Inc. "Notably, in the fourth quarter, we saw a flurry of larger deals."
Among the largest was the lease by Golden Oaks Inc., owned by North Carolina-based furniture company Klaussner Co., of nearly 269,000 square feet at 12828 Carmenita Road in Santa Fe Springs. Terms from owner MetLife Inc. were for five years at 50 cents per square foot triple net, which usually calls for the tenant to pick up taxes, insurance and maintenance costs.
Spurred by demand for space in both large and small buildings, the vacancy rate in the region fell to 2.7 percent from 3.4 percent in the third quarter and 4.6 percent in the year-ago period. Biven said those figures are nearing the recent historic low of 2.2 percent in the third quarter of 2001.
The strong market was reflected in the net absorption rate, which was substantially higher in the fourth quarter, at 1.5 million square feet, than a year earlier when the submarket gave back nearly 230,000 square feet. In the previous quarter, 1.1 million square feet of space was taken off the market.
It also was reflected in the availability rate, which, unlike the vacancy rate, incorporates space occupied by companies that are planning to relocate. According to data provided by Biven, the availability rate hit 5.4 percent in the quarter, compared to 8.1 percent in the year-ago quarter and an historic low of 4.8 percent in the fourth quarter of 2000.
Unlike a few years ago, Biven said the Mid-Cities market has slowly built up to its current strength. "Back then, the tech craze was in full swing and corporate America was in a major expansion mode. Companies were taking large blocks of space at a rapid pace," he said.
Interest in the Mid-Cities is now especially strong among logistics and distribution companies that do a considerable amount of business with the ports. These companies are attracted by the area's proximity to both L.A. and Orange counties, and its access to the freeways.
Tight industrial markets in surrounding areas, such as the South Bay, have prodded these companies to take up shop in the Mid-Cities. In the past, these companies have been drawn by relatively low rents, but that may change.
In the fourth quarter, the asking rents in the Mid-Cities stayed nearly the same as the previous quarter at 46 cents per square foot. That's lower than the South Bay's asking rent of 65 cents per square foot and down from 51 cents a square foot in the fourth quarter of last year.
Matt Eggleston, a senior associate with Cushman & Wakefield, said the trend is toward higher rents at Class A warehouse facilities, which are newer and have the latest amenities. "We have talked about a spike in rental rates for a little while now, and it seems to be here," he said. "Warehouses that a year ago were for 43 to 45 cents triple net are 48 to 50 cents for the same product now."
For example, Golden State Container leased 216,000 square feet at 15620 Shoemaker Avenue in Santa Fe Springs. The deal was for five years at 49 cents triple net.
Tim Cronin, a senior vice president at Lee & Associates, said rents hikes would continue: "You will see some upward pressure on rents. They should go up this year; I am not sure how much," he said.
So far, Biven said that companies aren't being pushed out of the Mid-Cities to other submarkets because of the rent increases. However, he said if increases mount, they could look elsewhere. He named the City of Industry, northern Orange County and the Inland Empire as possibilities.
"We are not seeing too much of that, but I think it is inevitable," said Biven.
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