COVER STORY, JULY 2009

INDUSTRIAL SPOTLIGHT
Propinquity to ports, population still bolsters the West. 
compiled by Brian A. Lee

Real Capital Analytics on western investment activity:

Las Vegas Industrial Overview

Beltway Business Park in Las Vegas, site of a 63-month lease in April

• Looking beyond the overall market downturn, certain Las Vegas industrial submarkets are faring better than others. Comparatively, the southwest is doing the best with new developments coming on line and a stable of tenants that exist mainly to service The Strip resort corridor.

• Location especially matters for firms that service the resort industry. For example, in one recent deal, the client could have saved up to 30 percent on its rent had it relocated to North Las Vegas or Henderson, but its operation would have been hindered by the limited access.

• Not only is area an important factor to consider, but also product type. The current economic cycle is very unique because larger developments that house larger, regional/national tenants are faring better because larger companies are better able to weather economic strains.

• With Las Vegas having been hit among the hardest of the nation’s cities, it has become harder to keep locally based, smaller tenants in smaller buildings. But national tenants are proving better able to stay afloat, thus keeping larger buildings occupied. This is a complete departure from the Gulf War era, when Las Vegas was more resilient than the rest of the country, so national clients were worse off.

• For these reasons, the current recession will have the largest impact on smaller commercial building owners, and their survival will depend on aggressive pricing. Especially with B/C-level products in B/C-level locations, owners will have to dramatically decrease prices as fewer tenants are vying to lease space. Owners not being aggressive enough or those simply chasing the market will not be as successful in recruiting and retaining tenants. And since the worst is yet to come, further reductions in rent rates are imminent and will be mandatory to fill space in the near term.

• While the overall vacancy rate is historically neutral, there is three times as much available space with far fewer prospective tenants. And while outside investors are taking a hard look at entering the market again, many still don’t have a high enough degree of confidence to make the leap.

Dan Doherty is a senior vice president in the industrial division of Colliers International – Las Vegas.

Los Angeles

1. MARKET MOVES

Due to the current economic situation, most planned projects are on hold, and any current spec projects under construction today would embody some level of anxiety for developers. There is a great deal of distress in the market, causing activity to slow and tenants and buyers to be in short supply.

While there is no concern about over building, readers should be aware of the substantial projects in various phases of delivery in 2009, including: Boeing’s Douglas Park, a 3.1 million-square-foot project in South Bay; Pacific Trade Center, a 400,000-square-foot project produced by Wohl Property Group in the East San Gabriel Valley; and River Court, which includes 122,000 square feet of small building space for sale in north Los Angeles.

As these projects deliver leased, sold or vacant space they will be a strong indicator of market conditions for the Los Angeles metro.

2. MARKET MEASURE

Availability and effective rents are significant determinants of where the Los Angeles area market is heading for the remainder of 2009.

Maintaining property value is paramount in this market, and as the rate of available product increases rents soften. The first quarter 2009 availability rate in Los Angeles increased 250 basis points from the same period in 2008, while rents have declined 11 percent. Availability is a good indicator to keep an eye on as a measure of where rents or property values may go.

A less publicized measure of the market is effective rents, as landlords compete by utilizing landlord concessions, including free rent, improvement allowances and the length of the lease. The difference between asking and effective rents is widening as the result of increased available product.

3. THE MARK OF A MARKET

The Los Angeles industrial market is home to one of the largest economic engines in the country: the ports of Los Angeles and Long Beach. However, in the midst of the current economic downturn, the combined import volume at the ports is down 22 percent compared to last year, and the local industrial sectors are feeling the pinch. There are no large parcels of land in these markets for any significant future development to increase the supply of industrial space. While gasoline prices have remained somewhat subdued, transportation costs will remain an important issue for warehouse users as the market gets back to normal. Proximity to the ports will reign supreme and the Los Angeles industrial real estate will remain in high demand.

— Chuck Hunt is executive managing director of Grubb & Ellis’ Los Angeles operations.

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