Major events in individual commercial and industrial real estate markets across the area in the fourth quarter.
Chalk this up as another sign of an economic recovery on the horizon: Los Angeles County’s industrial real estate market, once in a free fall, seems to have bottomed out.
While a true rebound could still be a year or two away, signs are there that it’s coming. Tenants are sniffing around properties again and eyeing expansions, though the increased interest has yet to translate into firm deals.
And the numbers support what brokers and landlords are seeing on the ground. The vacancy rate crept up just one-tenth of a point since the third quarter, as roughly 587,000 square feet came back on the market – about half of what was vacated in the third quarter. Similarly, average asking rents were down just a penny to 47 cents.
“The storm has passed and the worst is over,” said Craig Meyer, managing director and head of the industrial brokerage business for Jones Lang LaSalle in El Segundo. “We’re creeping our way back.”
It’s a sliver of good news in a fourth quarter littered with rising vacancy rates, negative net absorption and dropping rents in the office market. Sixteen percent of county office space was vacant in fourth quarter 2009, four-tenths of a point higher than in the third, according to Grubb & Ellis Co.
About 451,000 square feet of office space came back on the market in the quarter. That’s not as bad as the third quarter, when downsized and shuttered firms vacated 777,000 square feet. Still, the average countywide Class A asking rent slipped four cents from the previous quarter to $3.02.
“I wouldn’t say the worst is over. I think we are in the eye of the storm right now,” said Bob Safai, principal of Madison Partners in Brentwood.
While the local market has shown glimmers of improvement – three submarkets, the downtown L.A. area, the Westside and Hollywood, actually took back space in the fourth quarter – it could still be a couple of more years before landlords will see meaningful gains in leasing activity.
Questions about the financial health of the commercial real estate industry loom. Banks are holding billions of dollars of loans from office buildings built during the boom and worth considerably less than when the foundations were poured.
Meanwhile, declining rents have made it difficult for landlords to make payments, and the concessions some landlords have had to make – such as free rent or free building improvements – just to keep tenants have exacerbated the problem. The twin realities of declining capital values and falling rents have cast a pall over any potential recovery.
Safai of Madison Partners pointed out that the last time commercial real estate went into a significant spin in 1990, it took six years for the market to rebound. He predicted it would take until 2012 before the market begins to recover, and that asking rents could slide an additional 10 percent in some areas before flattening out.
Until then, savvy tenants continue to look for deals, lock down shorter and less pricey leases, and trade up to buildings they might not have been able to afford during the boom.
“It’s too early still for re-expanding, but there’re opportunities for companies out there,” he said.
Meanwhile, in the surprisingly improving industrial market, fourth quarter results were led by the South Bay region, where companies involved in port-related business leased up new space. Preliminary data released two weeks ago by the National Retail Federation said imports at the ports of Los Angeles and Long Beach should be up 3 percent in the first half of 2010.
Not coincidentally, the South Bay absorbed more than 470,000 square feet in the fourth quarter. It’s one of the few times that any area absorbed industrial real estate in 2009. Industry watchers took it as a signal that the market had hit bottom.
Howard Schwimmer, senior managing partner at Rexford Industrial, said the L.A. industrial real estate developer and manager is seeing small but noticeable increases in activity as tenants start to shop around for space again.
Brokers are fielding about 20 percent more inquiries than they did a year ago, he said. While few, if any, of those inquiries have become new leases, it’s a step in the right direction. Also, analysts said the countywide net absorption rate might creep back into the positive by late this year.
“It’s encouraging to me that a lot of people are just looking,” he said. “Rental rates may be flat for the next couple years, but you’ll see industrial real estate come back.”
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