Rapid expansion in the entertainment and high-tech fields and the general economic upturn have pushed vacancy rates for industrial space in the San Fernando Valley below 5%, creating the tightest industrial real estate market in the Southland, according to a new study.
From the growth of Disney, DreamWorks and Warner Bros. in the East Valley to burgeoning high-tech industrial developments in the west, the San Fernando, Santa Clarita and Conejo valleys are experiencing elbow-to-elbow occupancy rates that several analysts said are the highest in memory and perhaps the highest of all time. The industrial vacancy rate for Los Angeles County is also low at 7%.
Like the early settlers, new development in the Valley is moving from east to west, taking over 1960s-era properties once held by aerospace giants and the small entrepreneurs that fed them, said Jay Haskell, president of the Los Angeles-based brokerage Seeley Co., whose firm last week released its semiannual look at commercial real estate in the Southland.
Until this year, Haskell and other analysts said, tenants in the market for new industrial properties found the pickings rather slim.
"A 5% vacancy factor means they ought to be building more product," Haskell said. "In the '70s and '80s, we were building at a 10% vacancy rate."
Developers agree that it's time to build, said Grubb & Ellis analyst Michael Davin, who specializes in industrial real estate. Davin said 1998 will mark the first substantial industrial construction in seven or eight years in Los Angeles County and might well be the biggest year for industrial development since the mid- to late '80s.
Davin said the pent-up demand for industrial property along with the steadily declining vacancy rates has lured more developers back into the market this year. Backed by cash-rich real estate investment trusts, or REITS, he said more developers are launching speculative industrial projects.
"There is actually a lot of new construction on the horizon," said Davin, who said by his count, an estimated 5 million square feet of industrial space is due to come on line in the San Fernando-Santa Clarita Valley area within the next 12 months--much of it already spoken for.
"Last year, for all intents and purposes, we had no new major [industrial] construction," Davin said. "So this is really quite a dramatic turnaround."
Figures from the Construction Industry Research Board show that in Los Angeles County, permits have been requested for $149 million in new industrial construction for the first six months of 1998, nearly triple the six-month tally for 1997.
Davin said no other area of Los Angeles County can match the 2.2 million square feet of space under construction or in the works in Valencia.
"That's a big marketplace," Davin said, adding that the vacancy rate there is a tiny 1.5%.
As an outgrowth of the increased demand and limited supply, industrial rents, especially for new, so-called Class A space, have increased by about 5% in the last six months, the report said.
In most cases, however, the increase does not match the "exceptional growth" in rents seen in the past and might well stabilize as new industrial complexes open their doors.
Haskell sounded two cautionary notes on the industrial front:
He said that without substantial new construction, the day might come when the expansion-minded entertainment industry, which already has begun to extend west of its Burbank-Glendale base, might move back over the hill.
"That's the big question," said Haskell, commenting on the growing efforts to lure the entertainment industry back into the heart of Los Angeles. "Will the entertainment companies turn and go south once they get to the 405 [freeway]?"
Both he and Davin acknowledged that the concentration of industry workers who make their homes in the Valley helps guard against such a move.
Haskell also worried that too many Los Angeles County developers might respond to the current siren song and push through risky, speculative projects.
"If everyone builds everything planned, you could get to an overbuilt market," Haskell said.
"I'm not concerned that we won't see enough construction. The question is how much purely speculative construction will there be."