COVER STORY, JULY 2010
WESTERN INDUSTRIAL UPDATE
What are the newest or biggest trends in nine major markets as 2010's second half begins?
compiled by Brian A. Lee
As the second half of 2010 begins, Western Real Estate Business checks in with its broker friends for all of the major industrial trends.
San Francisco’s East Bay
Q1 2009 vacancy: 7.1 percent
Q1 2010: 11 percent
After the March 31st closing of the NUMMI plant resulted in 4,700 layoffs in the East Bay city of Fremont, Calif., Tesla Motors and Toyota announced in the second half of May that the plant will reopen for the manufacturing of Tesla electric vehicles.
The biggest trend for San Francisco’s industrial market is that, at $5.88 per square foot, average rents for industrial space in the East Bay market remained stable in the first quarter compared to the fourth quarter 2009. In fact, average rents declined just 2 percent during the year, making the East Bay one of the more robust industrial markets in the country. The biggest trend in the East Bay industrial market is that more tenants are taking strategic advantage of the down market with slightly more than 400,000 square feet of new space leased in the first quarter as well as numerous renewals. The biggest news for the market was Tesla and Toyota’s announcement they will team up to build electric cars at the former NUMMI plant in Fremont. Closure of the NUMMI plant on March 31 resulted in 4,700 layoffs and the prospect of weakening fundamentals in the East Bay industrial market. The May 20 announcement that the plant will reopen in the future to build Tesla vehicles will likely take some of that pressure off.
— Colin Yasukochi is director of research in Jones Lang LaSalle’s San Francisco office.
Q1 2009 vacancy: 3.8 percent
Q1 2010: 5.1 percent
The biggest trend in Los Angeles’ industrial market in 2010 is that we are seeing a slight reversal from 2009 in that demand for Class A product in port-centric submarkets like the South Bay is holding up. This is in part due to captive tenant renewals. Two prominent logistics firms recently signed leases totaling 600,000 square feet for $7.20 per square foot NNN, while the average market lease rates for Class A distribution space are approximately $6.60 per square foot NNN. Still, the fact that these deals are actually getting done is meaningful. Trade volumes increased at the ports significantly in May — 25.1 percent at Long Beach and 19.9 percent in Los Angeles. There is a strong correlation between import-driven tenants and improved trade flows.
— Paul Sablock is executive vice president of Jones Lang LaSalle’s Los Angeles office.
Q1 2009 vacancy: 4.6 percent
Q1 2010: 6.7 percent
The biggest trend in Orange County’s industrial market in 2010 is the emergence of guarded optimism. The desire to complete leases has increased slightly, and both sides of the lease equation are becoming a bit more flexible. Gaps that previously caused deals to fall apart are now often being bridged by landlords who appreciate the fact that we have not hit bottom and tenants who recognize that although the vacancy rate in Orange County has nearly doubled since 2007 the market is still only at 7 percent. Vacancy rates should peak at around 8 percent with negative absorption continuing this year, but at a much slower pace.
— Garrick Shupe is a vice president in Jones Lang LaSalle’s Orange County office.
Q1 2009 average asking rent: $0.76 per square foot NNN
Q1 2010: $0.59 per square foot NNN
We saw a significant increase in transactional activity in second quarter 2010. There is an abundance of space to choose from (see 15 percent vacancy factor), but tenants are feeling that they are at or close to bottom price points and are, therefore, not afraid to pull the trigger on executing leases, generally choosing to go longer term to secure those low price points. Landlords are also pushing back on tenants seeking unrealistic rents and concessions, which is helping to create a support level. During the 12 to 18 months prior, tenants were prolonging the search process in order to find a better property at a lower price point, which slowed the pace of transactions across the board.
— Michael Delew is a senior vice president in the Industrial Division at Colliers International – Las Vegas.
Q1 2009 vacancy: 14.4 percent
Q1 2010: 16.7 percent
The biggest trend in Phoenix’s industrial market in 2010 is large deal activity. Last year was very slow in all segments of the industrial sector; however, beginning late in 2009 and carrying forward into the first half of 2010, the volume of large transactions has been significant, even surpassing velocity during the booming years. Investor activity has remained relatively slow, but user activity greater than 200,000 square feet has increased. With the market having likely hit bottom, it appears that credit users have decided to take advantage of the depressed environment by capitalizing on competitive pricing and incentives. Some examples of this include a 465,000-square-foot build-to-suit by The Home Depot; a 618,990-square-foot purchase by Conair and a 304,400-square-foot purchase by Dunn Edwards Paint; as well as new leases of 460,000 square feet by Tower Automotive, 296,829 square feet by Staples and 216,845 square feet by philosophy.
— Bill Honsaker is managing director, Industrial/Supply Chain & Logistics Solutions, in Jones Lang LaSalle’s Phoenix office.
Q1 2009 vacancy: 7.4 percent
Q1 2010: 8.0 percent
The Denver industrial market is continuing to experience challenging conditions. However, there has been an up-tick in activity for a broad range of industrial uses. Landlords are being very aggressive to attract new tenants and maintain current rent rolls by offering drastically low starting lease rates, abundant tenant-improvement packages and large amounts of abated rent. The market for user building sales is showing signs of promise as prices for existing properties have reached levels 30 to 50 percent below replacement costs. Users are utilizing Small Business Administration, conventional financing and owner-carried financing to capitalize on great purchase opportunities.
— Tyler Reed is a senior associate, industrial, at Jones Lang LaSalle’s Denver office.
Salt Lake City
Q1 2009 vacancy: 7.5 percent
Q1 2010: 8.3 percent
The newest trend in Salt Lake City’s industrial market is the reuse of existing space. More owners and developers are constructing multi-tenant warehouses and flex buildings, which are occupied by smaller tenants. During the peak of the last business cycle (2004 through 2006), larger, single-tenant facilities were in demand among investors. With an increasing number of larger single-tenant, net-leased buildings going vacant in light of the recession, property owners have started to divide up their warehouses into smaller, more leasable spaces that appeal to a variety of tenants. This development trend will help owners/developers mitigate future risk of going completely vacant if they lose their only tenant.
— Adam Lewis is an industrial investment specialist in Marcus & Millichap’s Salt Lake City office.
Q1 2009 vacancy: 11.2 percent
Q1 2010: 11.3 percent
In the Treasure Valley, the worst appears to be in the rearview mirror. Industrial vacancy rates have begun to stabilize at anywhere from 11 to 11.5 percent, landlord asking rates are dropping, but not at an alarming rate, and tenants are actively looking for space in the market. One industry segment that has been very active has been solar panel companies. Construction remains at a standstill; there is no speculative building going on at this time and only a couple build-to-suit projects. The three major submarkets continuing to have the most activity are Meridian, Southeast Boise and Caldwell. Industrial land sales have been non-existent since 2008.
— Kris Haynes is director of research for Colliers International in Boise.
Q1 2009 vacancy (for Puget Sound area): 7.9 percent
Q1 2010: 9.3 percent
The newest trend in Seattle’s industrial market is the emergence of the blend-and-extend strategy. Unlike a traditional lease renewal, which is usually transacted in the final year of the existing lease, the blend-and-extend deals happen well outside of the 1-year mark. Renegotiations with 2 or even 3 years left on the lease are not uncommon in a blend-and-extend. Many tenants are using this strategy to reduce their real estate costs by decreasing their lease rates to the current market rates. Landlords have been open to this maneuver due to rising vacancy, which has made it more difficult for them to find new tenants to fill vacant space. The strategy has often proven to be a win-win in the Seattle market, allowing both tenants and landlords to achieve a higher level of certainty in exchange for select concessions.
— Matt McGregor is a senior vice president in Grubb & Ellis’ Seattle office.
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