October 12, 2017 Maria Verdin

3Q Industrial Market Summaries

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California continued to see improving economic conditions that translated into positive activity for commercial real estate markets. The state’s unemployment rate dropped 0.6 percentage points to 6.1% in July 2017 from 6.7% a year earlier. That momentum is reflected in the 3Q 2017 industrial market updates for Los Angeles, Inland Empire, Orange County and Ventura County from AIR CRE data partner, Xceligent.

The result of California’s overall economic prosperity has been increased demand for industrial space. Yet despite record levels of development, some of the nation’s tightest industrial markets are located in Southern California.

Los Angeles Industrial Market Overview

The Los Angeles-Long Beach-Glendale metropolitan statistical area recorded the creation of nearly 50,000 new industrial jobs over the past year. The five submarkets have a total inventory of 764 million square feet, which saw positive net absorption of 1.1 million square feet during Q3 2017. The total vacancy rate increased to 1.4% in Q3 2017 from 1.2% in 2Q 2017. Total availabilities increased 0.3% to 3.6% in the quarter, up from 3.3% during the same time period. Weighted average asking rents increased to $0.81 NNN per-square-foot, a change from $0.79, though the majority of larger availabilities are being advertised without an asking rate. Development continues to thrive with 6.7 million square feet currently under construction.

Los Angeles Industrial Market Recap

  • Inventory: 764,152,966 square feet in 18,432 buildings
  • Quarterly absorption: 1.1 million square feet
  • Total available rate: 3.6%
  • Total vacancy rate: 1.4%
  • Under construction: 7 million square feet
  • Delivered: 2.2 million square feet
  • Weighted average asking rate: $0.81 NNN

Market Highlights

Despite the vacancy rate experiencing a slight uptick, Los Angeles county’s industrial market remains the tightest in the country, with historically low vacancy rates across all five submarkets. Leasing activity declined from the previous quarter, even with an availability rate bump of 3 percentage points. Of note, the Central submarket recorded 487,277 square feet of positive net absorption, which lowered its vacancy rate to 1.5%, a drop from 1.7% at the end of 2Q 2017.

Landlords continue to benefit from tight market conditions, as tenants are increasingly challenged to secure expansion options in their current markets. The largest move-in during the quarter was FedEx taking occupancy of a brand new 450,000-square-foot build-to-suit facility in Arcadia.

The largest submarket, LA South (207 million square feet), experienced a decrease in direct vacancy to 0.8% in 3Q 2017 from 0.9% in Q3 2016. The next largest submarket, LA Central (196.8 million square feet), saw its vacancy rate tick down to 1.2% in the third quarter 2017 from 1.3% a year earlier.

Leasing activity was dominated by 340 deals in the under 25,000-square-foot category, including such notable transactions as simplehuman’s 219,280-square-foot deal at Pacific Pointe East at Douglass Park, and Home Furniture International’s 200,000-square-foot lease at 3030 S. Atlantic Blvd.

Among the largest sales transactions during the quarter were Rexford Industrial’s $210.5 million acquisition of Rancho Pacifica Industrial Park and AEW Capital Management’s $75 million purchase of Towers Industrial Park.

Inland Empire Industrial Market Overview

The Riverside-San Bernardino-Ontario metropolitan statistical area experienced a 3% increase in jobs from the previous year, with creation of 22,400 jobs from July 2016 to July 2017.

The area is split into two submarkets, East and West, including 516.5 million square feet of industrial space, which recorded nearly 8.2 million square feet of positive net absorption during 3Q 2017. Absorption was up from 4.1 million square feet in 2Q 2017. Total vacancies decreased from 3.6% in 2Q 2017 to 3.3% at the close of 3Q 2017. Total availability remained flat at 5.4% during the same period. Weighted average asking rates increased $0.02 NNN over the third quarter, though the majority of newer and larger blocks of space are marketed without advertised asking rates. There was 6.7 million square feet of new space deliveries during the third quarter and 26.1 million square feet under construction.

Inland Empire Industrial Market Recap

  • Inventory: 516,548,320 square feet in 6,333 buildings
  • Quarterly absorption: 8,184,030
  • Total availability rate: 5.4%
  • Total vacancy rate: 3.3%
  • Under construction: 26,113,781 square feet
  • Delivered: 6,757,551 square feet
  • Weighted average asking rate: $0.50 NNN

Market Highlights

The Inland Empire continues to be the hottest industrial market in the country, with 17.6 million square feet of net absorption recorded over the last four quarters. Roughly 4.3 million square feet of 3Q deliveries were claimed (leased or sold) before the close of the quarter. The historically low vacancy rate of 3.3% is driving a speculative construction boom. E-commerce, third party logistics and big box warehouse tenants continue to expand across the region. There were seven buildings above the 500,000-square-foot size that were occupied in the quarter, totaling more than five million square feet. Amazon continued its footprint expansion, adding another one-million-square-foot distribution facility to its portfolio, which brings its total occupancy to more than nine million square feet, and it has several other facilities in the works. Given the coastal markets struggles to deliver modern, Class A warehouse and distribution space, tenants will continue to be attracted to the Inland Empire’s facilities.

The West submarket totals more than 290 million square feet, while the East submarket exceeds 226 million square feet. The West has 5.7 million square feet of vacancies, while the East currently has 11.2 million square feet vacant. That is reflected in their respective vacancy rates of 2% for the West and 5% for the East.

Asking rates for the West ticked down to $0.57 in Q3 2017 from $0.58 a year earlier, while the East submarket was flat at $0.46 from Q3 2016 to 2017.

In addition to Amazon’s lease noted previously, three other Q3 deals exceeded the 725,000 square foot mark. NFI Industries took 864,000 square feet at Perris Distribution Center, LG Electronics took 830,750 square feet at Cajon Distribution Center and Caleres leased 725,160 square feet at Watson Industrial Park Chino. The biggest giveback in Q3 was Peng Cheng Aluminum’s more than 600,000 square feet at Meridian Business Park.

There were more than 200 lease transactions in the under 25,000-square-foot category, as well as 28 deals falling in the 25,000- to 100,000-square-foot category.

Sales volume dipped a bit in the third quarter, as did average sales prices. Among the notable sales transactions were GPT South Cactus Avenue Owner LP’s $72.3 million acquisition of 3255 S Cactus Ave. and Westcore II Cajon LLC’s $60.2 million purchase of Cajon Distribution Center.

Orange County Industrial Market Overview

Orange County has four submarkets with a total inventory of 250 million square feet of industrial space, which recorded 38,361 square feet of negative absorption during Q3 2017, the third straight quarter of negative absorption. Total vacancy increased to 1.9% in Q3 207 from 1.7% in Q2 2017, while total availability rate increased 0.5 percentage points to 4.4% over the same period. While the weighted average asking rates remained flat ($0.95 NNN), construction activity picked up in Q3 pushing past the one million square foot mark across the county.

Orange County Industrial Market Recap

  • Total inventory: 250,101,994 square feet in 7,377 buildings
  • Quarterly absorption: -38,361
  • Total available rate: 4.4%
  • Total vacancy rate: 1.9%
  • Under construction: 1,078,762
  • Delivered: 387,835
  • Weighted average asking rate: $0.95 NNN

Market Highlights

Orange County continues to experience strong industrial demand that’s being met with very few expansion options. One notable space giveback was Royalty Carpet Mill’s closure, which put 752,000 square feet of vacant space back on the market. But with limited new construction and most redevelopment activity involving conversions to residential or creative office conversions, it is expected limited supply of available space will continue to favor landlords.

With a vacancy rate of 1.9% and average asking rents at $0.95 NNN, Orange County remains one of the tightest markets in the country.

The largest submarket in Orange County is the North submarket with 105 million square feet. It has 3.4 million square feet available, more than one million square feet of vacant space and a vacancy rate of 1%. The submarket experienced 577,680 square feet of absorption during Q3 2017, bringing the yearly total of net absorption to 494,917 square feet.

The Airport Area’s base of 65 million square feet experienced more than one million square feet of negative absorption in Q3 2017. This market also saw its direct vacancy rate climb to 3.5% in Q3 2017 from 2% a year earlier, the largest such movement for the county, though its asking rate only moved up slightly to $0.88 in Q3 2017 from $0.87 a year earlier.

Among the largest lease transactions during the quarter were Shaw Industries, Inc.’s 280,125-square-foot deal at Cypress Distribution Center, Amazon’s 238,270-square-foot lease at 6400 Valley View St., and Jellco Container’s 206,766 deal at 1265 Van Buren St.

Lease transaction volume was most active in the under 25,000-square-foot category with 363 deals.

Sales volume was relatively flat, as was average pricing per-square-foot. Notable deals included DCT Industrial’s $56.6 million acquisition of 3454 E. Miraloma Ave., LBA Realty’s $41 million purchase of 500 W. Warner Ave., and Duke Realty’s $35.8 million acquisition of 6280 Artesia Blvd.

Ventura County Industrial Market Overview

The six submarkets comprising the Ventura County market have a total inventory of 65.4 million square feet of space that experienced 188,275 square feet of negative absorption in Q3 2017, which brought total absorption for the year to nearly 605,200 square feet. The county continues to experience healthy activity with strong leasing activity and increasing rental rates. Construction activity continues to flourish, with nearly 930,400 square feet of space under development.

The Moorpark/Simi Valley submarket recorded the largest net change in occupancy with nearly 117,000 square feet, which has dropped the vacancy rate to 1.9%. A shortage of modern industrial buildings, will push some overflow tenants from the San Fernando Valley into Ventura County when they are unable to secure expansion options in Greater Los Angeles.

Job creation in the Oxnard-Thousand Oaks-Ventura metropolitan statistical area totaled 8,700 over the past year. Industrial using jobs increased by 500 from July 2016 to July 2017.

Ventura County Industrial Market Recap

  • Inventory: 65,417,318 square feet in 1,812 buildings
  • Quarterly absorption: -188,275 square feet
  • Total available rate: 4.3%
  • Total vacancy rate: 2.9%
  • Under construction: 930,358 square feet
  • Weighted average asking rate: $0.72 NNN (up from $0.58 in Q3 2016)

Market Highlights

Leasing activity was divided into two size categories, with deals in the under 25,000 square foot category dominating the market with 75 transactions, compared to just six deals falling into the 25,000- to 100,000 square-foot range.

Direct vacancy rates across the county dropped to 2.7% in Q3 2017 from 3.7% a year earlier, with the Camarillo submarket increasing to 6.9% in Q3 2017 from 6.5% a year earlier. The county’s largest submarket, Oxnard/Port Hueneme, which contains roughly a third of the county’s total at nearly 22.3 million square feet, experienced a drop in vacancy to 1.9% in Q3 2017 from 2.8% a year earlier. Asking rates in the Conejo Valley continued to fall, dropping to $1.00-per-square-foot in Q3 2017 from $1.13 in Q3 2016.

The largest lease transaction was Simi Valley Unified School District’s 120,075-square-foot flex space deal at Simi Valley Business Center, while the largest giveback’s were Technicolor’s nearly 108,000-square-foot vacancy at Mission Oaks Corporate Center and the Ventura County Star’s nearly 75,000-square-foot vacancy at 151 Factory Stores Drive.

Sales volume continued to drop, though average price per square foot soared. Among the top sales transactions were Twenty Lake Holdings’ acquisition of 151 Factory Stores Drive for more than $8 million and 238 South Mariposa Street LLC’s purchase of 405 Science Drive for $7 million.

AIR CRE Reports

Xceligent Q3 2017 Industrial Reports:

Los Angeles Inland Empire Orange County Ventura