Q2 2012 Los Angeles, California Industrial Market Trends

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Q2 2012 Los Angeles, California Industrial Market Trends

The Los Angeles industrial market is on the upswing. “Performing better than expected, the perception that industrial real estate in the region hit bottom in 2011 is gaining traction,” according to the according to the 2013 International Trade Outlook by the Los Angeles County Economic Development Corporation (LAEDC). “Vacancy rates are declining across much of Southern California and rental rates appear to be stabilizing” and “a few markets are even starting to see an increase in rental rates.”


Reis reports a second quarter 2012 vacancy rate of 8.5% for 444 million square feet of multi-tenant warehouse/ distribution space in Los Angeles County, down 40 basis points from the prior quarter and 120 from the second quarter of 2011. The rate had peaked at 10.5% in the third quarter of 2010. For 38.7 million square feet of multi-tenant Flex/R&D space, Reis reports a vacancy rate of 6.0%, down 60 basis points from the prior quarter and down 260 basis points year-over-year.

Colliers reports a total vacancy rate of 4.5% for 882 million square feet in Los Angeles County, down 30 basis points from the prior quarter. Strong demand during the quarter was concentrated in Central Los Angeles according to this source, which puts the average asking rent at $6.00 psf. “Market fundamentals for the region continue to improve,” according to Cushman & Wakefield, “dropping the overall vacancy rate to 4.6%, the lowest since 2009.” “The marketwide vacancy rate will fall 60 basis points to 7.6%, after a 30-basis-point rise in 2011” according to Marcus & Millichap. Reis forecasts vacancy for multi-tenant warehouse/distribution space will finish 2012 at 8.5%, and then change little through 2015. For Flex/R&D space, Reis forecasts a year-end rate of 6.5%, with little change the next few years.


Warehouse/ distribution net absorption continued to be strong in the second quarter at 1.6 million square feet, after a slightly smaller amount was recorded for first quarter. A substantial 6 million square feet were absorbed in 2011, after a completion total of 587,000 square feet, according to Reis’ latest construction data Thus far in 2012, 812,663 square feet of such space has been completed. Reis tabulates 1.7 million square feet under construction in various warehouse/distribution projects, and well over 2.5 million in the planning stages. Reis estimates just less than 2 million square feet will complete in 2012, while net absorption will reach a remarkable 4 million square feet. Demand is forecast to keep a slight edge over new supply from 2013 to 2016, but not quite as much as the current dynamic scenario.

The second quarter saw a pickup in Flex/R&D net absorption, as the first quarter’s total of plus 47,000 square feet was a notably outpaced by the second quarter’s 242,000 square feet. Construction for this property type has been light, with no completions in 2011, but 250,000 square feet is forecast to complete in 2012. Reis predicts net absorption will reach 318,000 square feet. From 2012 to 2016, Reis predicts new construction will total 1.7 million square feet, or about 335,800 per year on average, while net absorption will all but mirror those amounts. Thus vacancy is expected to remain with 50 basis points of the current rate for the rest of the forecast period.

“In 2012, additions to supply will total 840,000 square feet, down from more than 900,000 square feet last year,” according to Marcus & Millichap. “There is currently 1,511,500 square feet of industrial space under construction as developers remain optimistic about the prospect of future rental rate increases,” according to Colliers. Cushman & Wakefield reports year-to-date overall net absorption at 1.3 million square feet, with a lack of available quality space suppressing leasing.


Warehouse/ distribution rents are edging up, with the average asking rent rising 0.5% in the second quarter to $6.01 psf and the average effective rent up 0.7% to $5.53 psf. The year-over-year gains are 0.3% and 1.5% respectively, and Reis predicts rents will rise by 1.5% asking and 2.0% effective for all of 2012. For Flex/R&D space, the average asking rent increased 0.4% to $11.01 psf in the second quarter, with the average effective rent up 0.5% to $9.87 psf. The year-over-year changes are negative 0.3% and positive 0.3%. Gains of 1.4% asking and 1.7% effective are forecast for this property type for 2012. Reis’ forecast calls for improving rent increases over the forecast period, but to no more than 2.5% in any year through 2016.

Cushman & Wakefield reports a 1.9% increase in direct asking rents year-over-year, to $6.36 psf. This source reports a direct weighted average rate of $6.24 psf for warehouse/distribution, and $9.12 psf for office/service. “Looking ahead to the rest of 2012,” according to the LAEDC, Los Angeles County will “see increases in rental rates accompanied by longer lease terms.” Reporting on the Los Angeles section of the greater LA Basin industrial market, Colliers reports a weighted average asking lease rate of $6.00 psf. According to Marcus & Millichap, “asking rents will increase 1.8% to $6.32 psf this year as effective rents rise 2.6% to $5.91 psf. Last year, losses of 0.8% and 0.3% were recorded for asking and effective rents,” this source notes.

Single property industrial sales volumes and prices dipped slightly in the second quarter, according to Reis Transaction Analytics. There were 57 deals totaling $371 million at a mean price of $92 psf. The quarterly sales volume is consistent with the quarterly values recorded in 2011 and 2010, according to Reis. The mean sale price of $6.5 million is up only slightly from first quarter’s $6.1 million.