Panelists said demand is gaining momentum for industrial properties in Southern California.

LOS ANGELES-Scarcity of product is holding back market activity, but demand for industrial property is gaining momentum, values are stabilizing, a new development cycle is underway and the Inland Empire is the runaway glamour market in Southern California. So said a panel of experts at the recent 21st Annual Market Review & Forecast presented by the AIR Commercial Real Estate Association here.

One interesting point was the paradox of Southern California’s recovery. “The recovery has been worse than average,” said Chris Caton, VP/research for Prologis. “We’re only halfway back on jobs and imports. Yet, the region is the net absorption leader with 72 million square feet absorbed last year.”

Caton reported that the region boasts a 3% industrial property vacancy and a development cycle trending up with 17 million square feet of space in the pipeline. “We’re getting back to normal for what is the world’s largest market. Cap-rate declines are near their end, and returns will be stable at a minimum.”

Adaptive re-use away from industrial is a somewhat alarming trend for the area, particularly with developable land being scarce and at a premium, causing a “dramatically shrinking” industrial base in Downtown L.A. Central, according to Jeff Rinkov, president of Lee & Associates, City of Commerce and CEO of Lee & Associates nationwide. “There’s quite a bit of industrial property being targeted for adaptive re-use. We are losing portions of our industrial core to creative-office space, retail and live/work uses. You’re more likely to see a coffee roasting/coffee shop use than pure industrial use in the core Downtown market because of the tremendous demand for higher and better uses.”

He added, however, that construction is “crawling back” in this market, with more than 1 million square feet underway in the City of Bell and City of Commerce and approximately 300,000 square feet of new construction at the Clean Tech site that is under contract for build-to-suit projects.

Scarcity of product is a concern for Jeff Chiate, executive director, capital markets group, for Cushman & Wakefield, Irvine, who said that everything is oversubscribed and the concern for industrial buyers is where to put their money. “If cap rates go up 100 basis points, we will need rents to rise 20% to offset that increase.”

Dave Harding, SVP of CBRE, Universal City, noted that the San Fernando Valley/Santa Clarita Valley vacancy rate is 1.1%, and while lease values have stabilized and sales are on the rise, it comes down to a lack of product—especially class-A buildings. “While there’s virtually no new development in the San Fernando Valley, the good news is that there are three projects planned in Santa Clarita valley that will provide 1.5 million square feet of space.”

The South Bay submarket is not recovering as quickly as some submarkets, noted Steve Bohannon, senior director, brokerage, for C&W, Torrance. But the 1.1-million-square foot Mercedes Benz lease at the former Boeing site in north Long Beach was a positive sign, he added.

Conversely, the Inland Empire has recorded 17 straight quarters of positive net absorption, reported Steve Bellitti, senior EVP at Colliers International, Ontario, and the region’s 4.2% vacancy is near historically low levels for a growth market like this one. “There’s real healthy demand and 16 million square feet of new space underway. Corporate America’s need for big-box buildings of over 500,000 square feet is driving the activity.” Bellitti noted that the growth of e-commerce means that these buildings will be used in a different manner than previous big-box buildings; even though they look the same on the outside, they are used differently on the inside—particularly with upward of 3,000 people employed in some buildings during peak periods.

Decreasing supply-chain costs of tenants is a central goal of the development sector today, said Jim Linn, SVP/investments for CenterPoint Properties, Los Angeles. He reported that 40% of his firm’s clients are trans-loaders, where goods come into a facility and exit sometimes just two hours later. He said the number of loading doors and training radius are among features vital to reigning in costs.

In commenting on legal issues impacting commercial real estate brokers, Lee Dresie, a partner in the Los Angeles law firm of Greenberg Glusker, underscored the importance of brokers disclosing everything they know about the property. “How you say tings is as important as what you say. Disclose, disclose, disclose. It’s the hindsight rule. If the unlikely risk you didn’t mention turns out to occur, judges and juries will, relying on hindsight, find it be a material fact that should have been disclosed.”