Industrial Lease Market Comes To a Standstill By SHELLY GARCIA Senior Reporter A contracting economy, low interest rates available for buying properties and the high cost of doing business in Los Angeles has all but shut down the industrial leasing market in the greater San Fernando Valley. Brokers say there are virtually no tenants shopping, let alone renting any industrial space, and properties are staying on the market twice as long as they once did as a result. The grim climate is not yet fully reflected in asking rents, brokers say, but only because lowering those rates on paper is futile without any prospective tenants on the horizon. The fact is that the few leasing negotiations that are taking place are resulting in deals well under the published lease rates. “The thing I’m observing is that there are few to no tenants in the marketplace looking for space of any size or significance,” said Jerry Scullin, a principal at Delphi Business Properties, a Van Nuys-based brokerage that specializes in industrial leasing in the Valley. “Blue chip buildings are sitting with no takers, no offers, and in many cases, no viewings even. I’ve never seen anything like it in 17 years.” In the first quarter of 2003, industrial vacancies across the San Fernando, Conejo and Santa Clarita valleys still averaged only 4.7 percent, according to a report recently released by Colliers Seeley, well under the double-digit vacancies in the office market. And net absorption is still in positive territory, meaning more space was occupied in the quarter than was vacated. Although asking rents have dipped by as much as $0.04 and $0.13 in the Conejo Valley and West San Fernando Valley respectively, rates in the Valley overall remained flat at $0.62, according to Colliers Seeley’s report. But brokers say the statistics don’t tell the whole story. A significant amount of the space absorbed has been in buildings acquired by newly minted user-owners, not in lease transactions, and space available for lease is sitting empty. “If you do the math, buying a building even at these extraordinarily high, per-square-foot prices, still makes your occupancy costs less than leasing,” said Greg Barsamian, senior vice president at CB Richard Ellis in Glendale. “So all that creates a huge flow of users and money into the purchase market, and some of that doesn’t necessarily result in a net increase in absorption. There’s a lot of trading space that’s going on, not necessarily growth.” Space considerations Locally, the industrial real estate market has always been somewhat more stable than the office market, largely because the Valley floor has not had the space to add new construction to the same degree that new office buildings have been erected. As a result, the vacancy rate has hovered around 4 percent to 5 percent for years, a figure that, for all intents and purposes, translates to full occupancy. And largely because there has been so little movement in the market, rents have held steady around $0.60 per square foot. But the natural churn in the market has always provided new prospective tenants for vacated space. Until now, that is. “We really haven’t seen companies starting to become profitable for organic reasons,” said John DeGrinis, senior vice president at Colliers Seeley. “They’re happy to just keep the doors open.” Some companies are leaving the area altogether. In recent months, Fitness Products International, a 26-year-old Sun Valley firm, made the decision to head for Las Vegas when the lease on its 50,000-square-foot facility expires this summer. Another large manufacturer that has made the Valley its home for 50 years, is likely to follow, Scullin said. “It’s about 90 percent that they are going to go,” he said. Those dynamics have led to a complete reversal in the business Delphi handles, Scullin added. “Usually, 85 percent of our business is leasing,” said Scullin, “and 15 percent is sale. Right now, it’s 75 percent sale and 25 percent leasing. It’s gone exactly the opposite way.” Rental woes Brokers earn more on sales than they do on leases, but the flip-flop is far more problematic for landlords with rental properties. “I had a situation (about a year ago) where we had two (nearly identical) buildings built simultaneously, one a 14,700-square-foot building for sale, the other a 15,350 square foot building for lease only,” said Robert A. Flink, senior vice president with CB Richard Ellis’s Conejo Valley office. “We sold the 14,700-square foot building within a few months from completion, and the 15,300-square-foot building for lease is still empty today.” Some brokers expect asking rates will soon come down far more dramatically, especially if, as happened in the office market, a significant amount of sublet space comes on the market. But even as asking rates hold steady, actual rates are declining, brokers said. “You can flip through the multiple listings and the listings are the same as they were 12 or 15 months ago, but what people are writing their deals at is coming down,” said Barsamian. “The bottom line is the market is soft enough on the leasing of the larger buildings that people are generally coming in extremely aggressive on their offers.”
