Industrial Transaction Volumes Headed Down

LOS ANGELES—Industrial transaction volume in the South Bay market are likely heading down as a result of the incredible dearth of supply. The market is now reporting a .5% vacancy rate, according to David Grote, principal at the Klabin Co. As a result, lease rates and property values are expected to rise, says Grote.

“It will likely make the volume of transactions lower,” Grote tells GlobeSt.com. “The majority of leases and sales are with companies already in the area. A company that might otherwise think of moving to a bigger or better facility might decide to stay put just because there aren't many better alternatives available.” Transaction volumes are already heading down. Last year, the South Bay market has 3.5 million square feet of leasing and sales activity, which, while a historical average, was a 20% decline from 2015 transaction volumes.

Even with lower transaction volumes, the vacancy rate plummeted in 2016, starting the year at 2.19% and ending the year .48%. Grote says, however, that the vacancy rate won't drop lower this year. “Even in the strongest landlord markets, one would expect the normal gyrations of the market to produce vacancy rates anywhere from where we are now up to 2%,” he says. “So the market can continue to be strong and we still may see somewhat higher vacancy.” With nowhere to go, transactions could become stagnant.

This will most certainly mean higher rental rates and sales prices, however, Grote says that the South Bay market competes with surrounding Southern California industrial markets to keep prices for skyrocketing. “Keep in mind that we are in a very large industrial market, over 250 million square feet, just in the South Bay, and the South Bay industrial market competes with other large Southern California markets,” he says. “In a market this large, there is always competition on the supply side, and landlords have to temper their enthusiasm because tenants almost always have choices.” Vacancy rates in almost all surrounding markets, however, are all below 2% as well.

For tenants, finding space is no longer about negotiation, but instead tenants need to prove credibility to win the few available deals over other potential tenants. “It used to be 'let's try to get a great deal—good rate, free rent, low rental adjustments, some tenant improvement dollars.' Now it's all about presenting yourself in such a fashion as to successfully obtain the building, often against competing offers,” explains Grote. “This might involve demonstrating strong financial capability and a good track record, and making the deal simple and easy for the landlord to make.”

LOS ANGELES—Industrial transaction volume in the South Bay market are likely heading down as a result of the incredible dearth of supply. The market is now reporting a .5% vacancy rate, according to David Grote, principal at the Klabin Co. As a result, lease rates and property values are expected to rise, says Grote.

“It will likely make the volume of transactions lower,” Grote tells GlobeSt.com. “The majority of leases and sales are with companies already in the area. A company that might otherwise think of moving to a bigger or better facility might decide to stay put just because there aren't many better alternatives available.” Transaction volumes are already heading down. Last year, the South Bay market has 3.5 million square feet of leasing and sales activity, which, while a historical average, was a 20% decline from 2015 transaction volumes.

Even with lower transaction volumes, the vacancy rate plummeted in 2016, starting the year at 2.19% and ending the year .48%. Grote says, however, that the vacancy rate won't drop lower this year. “Even in the strongest landlord markets, one would expect the normal gyrations of the market to produce vacancy rates anywhere from where we are now up to 2%,” he says. “So the market can continue to be strong and we still may see somewhat higher vacancy.” With nowhere to go, transactions could become stagnant.

This will most certainly mean higher rental rates and sales prices, however, Grote says that the South Bay market competes with surrounding Southern California industrial markets to keep prices for skyrocketing. “Keep in mind that we are in a very large industrial market, over 250 million square feet, just in the South Bay, and the South Bay industrial market competes with other large Southern California markets,” he says. “In a market this large, there is always competition on the supply side, and landlords have to temper their enthusiasm because tenants almost always have choices.” Vacancy rates in almost all surrounding markets, however, are all below 2% as well.

For tenants, finding space is no longer about negotiation, but instead tenants need to prove credibility to win the few available deals over other potential tenants. “It used to be 'let's try to get a great deal—good rate, free rent, low rental adjustments, some tenant improvement dollars.' Now it's all about presenting yourself in such a fashion as to successfully obtain the building, often against competing offers,” explains Grote. “This might involve demonstrating strong financial capability and a good track record, and making the deal simple and easy for the landlord to make.”