Article - Industrial lease rates finally going up

Sep 2011

Most Inland Southern Californians are still waiting for the effects of the recession to abate, but for the owners of industrial properties, the last few months appear to indicate that a milestone of sorts has been reached.

Lease rates for distribution space and other industrial buildings in San Bernardino and Riverside counties, which fell precipitously when the economy sagged in 2008 and 2009, increased in July and August, according to a report by Voit Real Estate Services. It was the first increase for industrial lease rates in the Inland area since late 2007.

In its mid-quarter report, Voit said Orange County's lease rates also started moving up during the third quarter. In Los Angeles County, the increase happened in the second quarter.

Most industrial buildings in the Inland area are used for distribution centers, and the typical tenant is now paying about 35 cents per square foot each month to lease a property, Voit reported. Leases cost 55 cents per square foot per month in Los Angeles County, and 43 cents in Orange County.

Lease rates and vacancies in this sector have been stabilizing for more than a year, and most of the people in the Inland area's commercial real estate industry were expecting market conditions to improve in 2011.

"These recent upticks in industrial lease rates are a clear example of that improvement," Jerry Holdner, vice president of market research for Voit, said in a statement.

An average month's rent on an Inland warehouse was stuck at 34 cents per square foot for the last seven quarters, Holdner said in an interview. The asking rate for space was 45 cents in the fourth quarter of 2007, when the recession started, and some were willing to pay much more than that for a place with an ideal location.

The last 12 months has seen renewed interest from tenants -- many of whom already were operating at Inland addresses -- who used the low rates to move to facilities with better long-range options.

Several consolidated from two smaller facilities into one.

Tenants have been trying to take advantage of the low rents to get five-year leases, Holdner said.

A few years ago many weren't willing to go longer than three years.

"It's an attractive time to go longer," Holdner said.

David Salazar, whose Irvine-based company, The Salazar Group, represents tenants exclusively, said he has been counseling his clients to make long-term moves now.

"I keep encouraging them, even if they have a year left on the lease, not to wait a year until it expires," Salazar said.

"Who knows what it's going to be like in another year?"

The vacancy rate for industrial space has been falling, indicating the interest from tenants and buyers. Nicholas Chang, vice president at NAI Capital's Ontario office, said vacancies at warehouses have dropped from above 10 percent a year ago to about 7 percent now.

"Three percentage points in a year is a major shift," Chang said.

But there are no indications that the higher lease rates will slow interest in Inland properties.

What is happening, Chang said, is that landlords who have offering incentive-laden lease deals during the last two years are not making as many aggressive offers.

The interest in industrial space is happening across the Inland area, and Chang said the east submarket, which includes cities such as Riverside, Redlands and Moreno Valley, should see its share of tenants.

 Source: JACK KATZANEK

Dy Associates is an Oakland Real Estate company specializing in commercial, home and investment property in the Oakland and East Bay Area. We provide real estate services including buyer agent, seller agent, short sales, commercial and investment aquisitions, loan facilitation, hard money lending, proerty management. Articles are provided as information only. We do not provide legal or general investment advice.