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LOS ANGELES-Leasing of industrial space is still sluggish despite fast-paced sales of owner-user buildings, but “the worst is over” in the industrial market, according to a report issued yesterday by Marcus & Millichap.

The M&M report was one of two to hit the streets this week that focused on the local industrial sector. The other from Van Nuys-based Delphi Business Properties cited “a gradual upswing” in industrial leasing as building owners lower rental rates.

Despite what the Marcus & Millichap report called “a collapse in tenant demand,” it quoted Encino-based Harvey Green, M&M’s president and CEO, saying that “the worst is over” for the industrial sector, locally and nationally. The outlook is part of Marcus & Millichap’s 2003 National Industrial Research Report, which says, “the future looks brighter” for the industrial sector as growing strength will fuel demand in the manufacturing, distribution and trade sectors.

In Los Angeles, renewed job growth in 2003 will help return net absorption to pre-2001 levels, the M&M report says. It notes that developers added nearly 18 million sf of new industrial product in the past several years, yet the weakened economy precluded companies from absorbing the space and kept net absorption at just 1.7 million sf.

By yearend 2002, vacancy rate rose to 7.7%, up nearly 3.7% from 2000. Marcus & Millichap predicts the vacancy will dip to 7% near the end of the year in LA as the economy improves, with the South Bay submarket enjoying much of the improvement because of increased activity at the ports.

The Delphi Business Properties report, focusing on the San Fernando Valley, says the industrial leasing market “has been virtually non-existent” since Sept. 11, 2001. The industrial market has been sustained by low interest rates, which have buoyed owner-user sales. But owners of “for lease” buildings have begun lowering lease rates lately in recognition that competition for tenants is keen, Delphi says.

Many buildings in the 30,000-sf to 50,000-sf range have been on the market for 12 to 18 months, according to the Delphi report, but most of the demand has been for buildings below 10,000 sf. Jerry Scullin, a Delphi principal, says activity in the leasing market is a more significant barometer of the economy because it implies an investment on the part of companies in their core business, not in real estate.

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