Since emerging from the depths of recession in the mid-1990s, the Los Angeles area's industrial real estate market had posted record levels of activity year after year--until now.
Leasing rates have leveled off after climbing steadily for years. Tenants have postponed decisions and are shopping around more as space opens up. The volume of property being leased and sold has dropped sharply from last year's red-hot levels.
Although the pace of activity has slowed, vacancy rates remain remarkably low, and many large industrial tenants continue to pounce on large, modern buildings in desirable markets. For example, in Ontario, shoemaker Skechers USA wasted no time in taking over the mammoth, 750,000-square-foot warehouse and distribution center once occupied by now-defunct Internet retailer EToys.
"The major [tenants] . . . the solid companies are making moves," said industrial real estate broker Darla Longo. The market "is not robust, but it's consistent and steady."
Los Angeles' industrial property landlords have so far fared pretty well given that the nation's economic slowdown hit manufacturers first and hardest. In fact, a few local industries, such as aerospace and medical equipment makers, are expected to expand and need growing room, brokers said. The demand for warehouse and distribution space remains healthy, with firms involved in airfreight among the most active tenants.
During the first quarter of 2001, the average asking leasing rate for Los Angeles County, 51 cents per square foot, remained virtually unchanged from the same quarter last year, according to a report by real estate firm CB Richard Ellis. The first-quarter vacancy rate of 3% was also about even with last year's. However, the amount of industrial space that was leased or sold dropped almost 20%.
"Even though we are seeing signs of the economy slowing a bit, we are not seeing a tremendous impact," said Russell Pierce, executive vice president of McMahon Development Group. "There has not been the gross overbuilding that there was in the late '80s" that contributed to a real estate bust in the early 1990s.
But the market's shift into what many describe as a steady, sustainable pace is a dramatic change from the frenzy of recent years. Since 1994, for example, leasing rates for large industrial buildings in the South Bay, Commerce and other industrial centers had skyrocketed more than 50%, said broker Longo at CB Richard Ellis. Now, many tenants can afford to wait and shop for space knowing lease rates aren't going to rise as rapidly as they once did.
"A lot of people are in shock because the market is not like it once was," Longo said. "We are back to normal growth, and we will just chug along."
The continued demand for industrial and warehouse space will be fueled in part by planned port expansion and the completion of the Alameda Corridor, which will speed freight rail transport in central Los Angeles. Large, modern industrial buildings continue to be rare commodities, and space is still scarce in many key markets. The vacancy rate in central Los Angeles, for example, was only 1.5% during the first quarter.
In Irwindale, McMahon Development is starting construction on a $20-million mid-size industrial park, where six of the eight buildings have been sold.
"I have very little doubt that we will soon be sold out," McMahon's Pierce said.
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Industrial Space Slowdown
After years of rapidly rising rents and strong leasing activity, the Los Angeles industrial real estate market has slowed during the last year. Amount of space leased or sold:
1st quarter 2001: 8.4 million square feet
Source: CB Richard Ellis