WESTERN SNAPSHOT, DECEMBER 2010

Los Angeles Industrial Market

Increased consumer spending, cheap money and stronger trade are fueling the Los Angeles industrial market. Given the relative strength of all three economic indicators, Los Angeles industrial rents are stabilizing and investment capital is hungrier than ever. Tenants are still looking to capitalize on the historically low rents and lock in leases before the economy makes a full recovery. 

Vacancy in the third quarter remained unchanged at about 3.5 percent and absorption is nearly flat, even as transaction volume has increased since this time last year. Most leases have not been expansions as users continue to consolidate and search for economic benefits in relocating. Buyers of small buildings are capitalizing on attractive SBA incentives and historically low interest rates. Two 30,000-square-foot buildings in Rancho Dominguez sold to users at $100 per square foot.

Driven by the ports of Los Angeles and Long Beach, the Los Angeles industrial market has experienced a meaningful boost in activity since 2009. Container volumes at the ports are up over 20 percent from last year’s volumes and the Port of Los Angeles broke the all-time monthly record for container volume in August with more than 464,045 TEUs passing through its terminals. (TEUss are a measure used for capacity in container transportation – usually a 20-foot equivalent).

Recent changes in port drayage, driven by the ports’ clean-air action plan, have led to a shortage in equipment, driving traditional inland warehouse users closer to the ports. Several shipping lines have recently announced a plan to shift container chassis responsibility from the terminals to the trucking companies. This fundamental change in operation has trucking companies rethinking their real estate needs. Trucks that would otherwise pick up a container and chassis from the terminal will now be required to lease, maintain and, most importantly, provide sufficient real estate to store the chassis. With industrial zoned land already at a premium, trucking company demand has bid up the price of land for sale and lease near 2006 levels.

Fueled by abundant capital and few quality investments, KTR Capital Partners recently purchased a 176,656-square-foot NNN-leased investment in Compton. The subject property is leased through 2016 and features trans-loading capabilities with more than five acres of extra land. This purchase from First Industrial Realty Trust further supports the ongoing demand for trans-loading buildings with doors and extra land for container storage. AMB Property Corp., CenterPoint Properties Trust and Terreno Realty Corp. are also aggressively looking to place capital in Los Angeles County and take advantage of the historically low borrowing rates.

Industrial brokers in the marketplace are experiencing increased activity, which has fueled Los Angeles’ first speculative construction project in more than 2 years. Confidence in the recovery has prompted ProLogis Corp. to construct a 270,000-square-foot building in Carson, while others will soon follow suit.

The lease market continues to tighten for quality buildings. One of the market’s largest landlords, Watson Land Co., currently reported 98 percent occupancy following third-quarter leases of more than 500,000 square feet. With transaction volume continuing to increase, expect tenants to begin losing the leverage they once had in the marketplace.

Frank J.H. Schulz III is an agent at The Klabin Company/CORFAC International in Torrance, Calif.

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