Business from the county's booming ports drove industrial vacancy rates in the Mid Cities to historically low levels in the second quarter, with the shortage of space cooling real estate activity.
Second quarter vacancy rates in the industrial region, which includes Santa Fe Springs, La Mirada, Buena Park, Cerritos, Norwalk, and Downey, dropped to 2.4 percent, down from last quarter's 2.5 percent and the 4.3 percent of a year ago, according to Grubb & Ellis Co.
John Biven, first vice president at CB Richard Ellis Group Inc. said the rates are at the lowest levels of the past 20 years. It was the fourth consecutive quarter in which there was a drop.
"Sixty percent of everything imported in the nation comes from the Los Angeles and Long Beach ports," said Tim Cronin, senior vice president at Lee & Associates. "Because of that, companies want to be located near ports to get access to the product."
That proximity to the ports, as well as several major freeways, makes the Mid Cities particularly attractive to distribution companies. As industrial markets tighten across the board, the demand from areas such as the South Bay is spilling over into the submarket. As space continues to dwindle and prices continue to rise, however, sales and leasing activity is slowing down.
The April-June period saw 1.5 million square feet sold or leased. That was 35 percent lower than the 2.3 million square feet bought and leased last quarter, and about 25 percent lower than the 2 million square feet seen in the same quarter a year ago.
"There were not that many large deals mainly because there is a shortage of large blocks of space available on the market," Biven said. "There is a lack of new development, a lack of developable land and the buildings that are left are older and less functional."
Still, the decrease in overall activity does not indicate a weakening market. Sales and leases of new sites increased by approximately 10 percent from last quarter, according to Biven. One of the largest deals was a two-year sublease by Kintetsu International of 171,508 square feet at Golden Springs Business Park in Santa Fe Springs. Terms of the sublease, from a division of Tyco International Ltd., were undisclosed.
Argus Realty Investors LP sold the 23-building, mixed-use Heritage Corp. Center business park in Santa Fe Springs to Legacy Partners for $84.2 million. The project was 98 percent leased upon sale.
The net absorption rate, like sale and lease activity, was down from the previous quarter. Only 327,609 square feet of space was taken off the market this quarter, compared with 482,574 square feet in the first quarter. Building also slowed, with just 254,454 square feet of space under construction this quarter, compared to 1.3 million square feet in the same quarter last year.
With market fundamental so tight, prices continue to rise. The asking rent reached 55 cents per square foot triple net, up slightly from last quarter's 53 cents. That's lower than the South Bay's asking rent of 65 cents per square foot, but a 10 percent increase from the second quarter of last year when the going price was 48 cents per square foot. (Triple net requires the tenant pay for taxes, insurance, and maintenance costs.)
Cronin speculates that prices may have reached a peak and could begin to fall in the near future. "Even though vacancy rates are low, as interest rates rise it will become more difficult for buyers to finance buildings," he said.
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