Despite concerns over a looming economic slowdown, the San Gabriel Valley’s trade dependent commercial real estate market continued to tighten in the second quarter.
In both the office and industrial markets, space was taken off the market and little new product became available, sending asking rents higher shooting up on both sides of the aisle.
Industrial sale and lease activity nearly doubled to 1.1 million square feet during the second quarter, according to Grubb & Ellis Co., while net absorption increased to 937,114 square feet from 472,279 square feet in the first quarter
“Leasing activity is higher. The demand for buildings is still there but we’re getting some resistance on the pricing of real estate,” said Mark DiGennaro, an agent with Lee & Associates. “If companies can’t find the right building to buy they’re either renewing their leases or looking for lease alternatives.”
In an example of that trend last quarter, GL Food Wholesale renewed its lease of 60,000 square feet of industrial space in the City of Industry for five years. The company had been looking to purchase a building but couldn’t find anything in its price range, said Jim Center, senior vice president of Grubb & Ellis.
New companies coming to the area to purchase or lease large space may have to look elsewhere.
“We don’t have a lot of new construction coming on line and we don’t have land,” said Center. “Some of the larger deals will be forced further east to the Inland Empire.”
Industrial vacancy rates fell by nearly a half point last quarter, to just 1.5% of the region’s 179 million total square feet. Rents dropped a penny to $0.52, but were up from $0.47 during the same period a year prior.
“We’re getting a slight (rent) increase across the board in all property size ranges since the absorption of available lease buildings has been so good,” DiGennaro said. “The problem is there’s very little new product for sale. So we’re seeing a lot of second, third, fourth, generation with higher asking prices.”
New development at Majestic Realty’s Grand Crossing project in the City of Industry could help solve the problem beginning next year. Kent Valley, senior vice president with Majestic, noted that in addition to the 550,000-square-foot Building 25 that broke ground last quarter, construction began this month on Building 26, a 125,000-square-foot facility. Both industrial buildings are slated to come on line in 2007, bringing Grand Crossing’s total industrial square footage to over 4 million. Construction of a 950,000-square-foot building as well as a 230,000-square-foot structure is scheduled to begin in October. The project is slated for 6 million square feet at build-out.
Last quarter, food processor and distributor Golden State Foods took occupancy of 270,000 square feet of space at Grand Crossing, while home appliance manufacturer Sunpentown took the remaining 80,000 square feet of the same building.
On the sale side, Interbath, a maker of shower and tub systems, sold a 97,816-square-foot building in the City of Industry to First Industrial LP for $8.3 million.
Office rising
The San Gabriel Valley’s office market also finished strong last quarter as Class A asking rents jumped 7 percent to $2.37, up from $2.16 during the second quarter of 2005. Class B rates increased $.07 to $2.04, up $0.16 from the same period a year ago.
“We’ve had record everything in the last couple of years,” said Ron Heim, senior vice president/principal with Trammell Crow Co. “Record absorptions, record low vacancy rates, record high asking rates and very little under construction.”
While last quarter ended with no new office construction under way, later this summer Trammell Crow will break ground on Phase III of Innovation Village at Cal Poly Pomona, a three-floor 120,000-square-foot Class A office building.
The building is slated for completion a year from now. Construction will begin on an additional building, Phase IV, during the first quarter of next year. The first two phases of Innovation Village include a 54,000-square-foot fully leased to tenants including NASA/JPL, Biosense Webster and the 205,000-square-foot American Red Cross Blood Bank.
“The new development is pretty much in line with what the absorption has been. It’s not going to be an over-build,” said Heim. “We’re probably behind the curve in that sense, which is good.”
The San Gabriel Valley’s office vacancy rate fell nearly a point to 9.1 percent last quarter, while net absorption climbed to 128,303 square feet, a significant increase from the 91,859 square feet the market gave back during the prior three month period.
“East of the 605 Freeway is where a lot of the growth is going on and where a lot of the action is,” said Heim. “The education base and affordable housing is what’s driving that.”
In a major office sale last quarter, Foothill Transit acquired the Washington Mutual Business Center in West Covina for $8.5 million. Foothill Transit has made the location its new administrative headquarters.
