The Industrial Vacancy Inches Down Even Further

The industrial vacancy rate in the Mid Counties market continues to inch down even further. According to the second quarter report from Colliers International, the Mid Counties industrial vacancy rang in at 0.6% for the quarter, closing out seven consecutive quarters of sub 1% vacancy in the L.A. submarket. While the vacancy rate didn't change over the previous quarter, absorption was positive at nearly 30,000 square feet. As a result, rental rates continued to rise, increasing $0.02 per square foot to $0.68 per square foot triple net. To find out more about the market and how long this intense activity and near 0% vacancy rate could last, we sat down with Chris Sheehan, EVP at Colliers International, for an exclusive interview.

GlobeSt.com: How are tenants and landlords reacting to the dearth of supply?

Chris Sheehan: There is always going to be space available in the market. Even though the inventory is sub 1%, if you are working with tenants, there is still space to find. Landlords, however, are being extra picky on credit, so if you are running with a good credit tenant, landlords will work with you. If you are running with a sub-par credit tenant, then you may not get a shot at the space. I am looking at a property now, and they have had two or three tours each day and three deals makeable deals on economics, but the landlord is being patient. That is a typical tour. It is heavily competitive and credit driven with all-time lease rates.

GlobeSt.com: Can the vacancy rate get pushed even lower?

Sheehan: There is obviously not a lot of development relative to the size of the market, and there is 2.5 million square feet being developed in the Mid Counties market for a 120 million square foot base. A lot of that is getting absorbed before it is built. There are always going to be buildings coming into the market. A 0% vacancy rate is never going to happen, but with a limited vacancy rate, I can see rates getting pushed north until there is an event that makes people take a pause.

GlobeSt.com: How has the low vacancy rate affected your business?

The major dynamic with this low vacancy rate is that, because there are limited opportunities, you are forced to look to other markets that your client may not ultimately want to be in, and you have to be a little more creative when you are looking for opportunities for your clients.

GlobeSt.com: As a result of the increasing rents, is the market shifting to more big-name credit tenants?

Sheehan: There is too much distribution and there are too many new players. There are always going to be a new start-up manufacturer that is growing and can enter the market. Los Angeles is the largest manufacturing market in the country, and it is the largest market in terms of square footage. So, it is really too large for any one industry to overtake. Amazon is trying, and they are taking a lot of space; however, even the space that they are taking is a small percentage of the market. In the South Bay market, there are a lot of mom and pop 3PL companies that aren't credit tenants.

GlobeSt.com: Private or mom-and-pop companies aren't being pushed out by the low rates?

Sheehan: They are passing through the real estate costs to their customers, and the customers don't have anywhere to go, because even if they bid to other 3PL providers, most of them are either paying the high rental costs currently or they are anticipating higher rental costs, so it is a fairly level playing field for the 3PLs.

GlobeSt.com: How long is this kind of market sustainable?

Sheehan: I think that everyone is waiting for something to happen because everyone is starting to scratch their heads and wonder how long this is sustainable. The fundamentals, however, are very strong. People are optimistic in the economy, and there is no excessive growth. People are also being a little more cautious.

The industrial vacancy rate in the Mid Counties market continues to inch down even further. According to the second quarter report from Colliers International, the Mid Counties industrial vacancy rang in at 0.6% for the quarter, closing out seven consecutive quarters of sub 1% vacancy in the L.A. submarket. While the vacancy rate didn't change over the previous quarter, absorption was positive at nearly 30,000 square feet. As a result, rental rates continued to rise, increasing $0.02 per square foot to $0.68 per square foot triple net. To find out more about the market and how long this intense activity and near 0% vacancy rate could last, we sat down with Chris Sheehan, EVP at Colliers International, for an exclusive interview.

GlobeSt.com: How are tenants and landlords reacting to the dearth of supply?

Chris Sheehan: There is always going to be space available in the market. Even though the inventory is sub 1%, if you are working with tenants, there is still space to find. Landlords, however, are being extra picky on credit, so if you are running with a good credit tenant, landlords will work with you. If you are running with a sub-par credit tenant, then you may not get a shot at the space. I am looking at a property now, and they have had two or three tours each day and three deals makeable deals on economics, but the landlord is being patient. That is a typical tour. It is heavily competitive and credit driven with all-time lease rates.

GlobeSt.com: Can the vacancy rate get pushed even lower?

Sheehan: There is obviously not a lot of development relative to the size of the market, and there is 2.5 million square feet being developed in the Mid Counties market for a 120 million square foot base. A lot of that is getting absorbed before it is built. There are always going to be buildings coming into the market. A 0% vacancy rate is never going to happen, but with a limited vacancy rate, I can see rates getting pushed north until there is an event that makes people take a pause.

GlobeSt.com: How has the low vacancy rate affected your business?

The major dynamic with this low vacancy rate is that, because there are limited opportunities, you are forced to look to other markets that your client may not ultimately want to be in, and you have to be a little more creative when you are looking for opportunities for your clients.

GlobeSt.com: As a result of the increasing rents, is the market shifting to more big-name credit tenants?

Sheehan: There is too much distribution and there are too many new players. There are always going to be a new start-up manufacturer that is growing and can enter the market. Los Angeles is the largest manufacturing market in the country, and it is the largest market in terms of square footage. So, it is really too large for any one industry to overtake. Amazon is trying, and they are taking a lot of space; however, even the space that they are taking is a small percentage of the market. In the South Bay market, there are a lot of mom and pop 3PL companies that aren't credit tenants.

GlobeSt.com: Private or mom-and-pop companies aren't being pushed out by the low rates?

Sheehan: They are passing through the real estate costs to their customers, and the customers don't have anywhere to go, because even if they bid to other 3PL providers, most of them are either paying the high rental costs currently or they are anticipating higher rental costs, so it is a fairly level playing field for the 3PLs.

GlobeSt.com: How long is this kind of market sustainable?

Sheehan: I think that everyone is waiting for something to happen because everyone is starting to scratch their heads and wonder how long this is sustainable. The fundamentals, however, are very strong. People are optimistic in the economy, and there is no excessive growth. People are also being a little more cautious.