Demand for warehousing, distribution and manufacturing space in the greater Los Angeles Basin will continue to outpace supply, vacancy rates will slide toward pre-recessionary levels, and asking rental rates will rise marginally as developers and investors begin delivering new buildings to what is already the nation’s largest industrial market in 2014, according to a study issued by Colliers International.

In the same report, which reviewed both the 2013 industrial market and forecasted market conditions for 2014, it was noted that the final quarter of the year was the 15th consecutive three-month period of positive net absorption, placing upward pressure on asking monthly rental rates for Class A industrial properties.

Region-wide vacancies declined at year’s end to 3.5 percent, down from 3.7 percent in the third quarter with some submarkets reporting vacancies as low as 2 percent. Positive net absorption reached 7,242,300 square feet in the fourth quarter, with gross leasing activity of 24,232,800 square feet. Monthly asking rental rents in the region rose to 51 cents per square foot on a triple-net basis (NNN) in that final quarter.

Developers, meantime, completed 3.3 million square feet of new industrial space during the fourth quarter with another 20 million square feet currently under construction and scheduled to be delivered to the market over the next 12-24 months, the report noted. But the availability of developable land is shrinking as the market matures, with most new development being focused on the Inland Empire.

“Despite the addition of this new space during the fourth quarter, most of which was completed for build-to-suit tenants, there remains a shortage of Class A industrial space that can accommodate the needs of retailers who are rapidly expanding their E-commerce capabilities,” said Colliers Executive Managing Director John Hollingsworth. “There is a sizable amount of space under construction with high interest from tenants during the construction phase. The outlook for this year is that it could be a breakout year for new construction, especially in the east Inland Empire and other areas where developable land is still available.”

Overall, there is a total existing base of 1.51 billion square feet in the greater Los Angeles region, which includes the counties of Los Angeles, Orange, San Bernardino, Riverside, and Ventura. Importantly, Hollingsworth noted, those counties also include the major ports of Los Angeles and Long Beach and, to a lesser extent, Port Hueneme, which are handling an increasing number of imports and exports, a factor that is one of the leading drivers of demand for close-in distribution space.

According to the report, while the Inland Empire remains the only area in the basin where raw land is still available for speculative construction, there is still a huge demand from buyers looking to purchase new construction in the more urbanized in-fill markets that are closer to the ports. Since the recession of 2008, developers have been unable or unwilling to build large warehousing and distribution centers without the certainty of knowing that leases had been signed prior to breaking ground, according to Hollingsworth. However, these latest research numbers may change the perception of some builder-investors, he noted.

“With these new numbers showing such strong demand, and with the success of the one major spec development that opened in the past year in the Inland Empire -- the Empire Gateway project in Chino -- we believe others may now be convinced to follow their lead,” Hollingsworth said. “High demand combined with low vacancies and strong absorption should act as a catalyst for developers and investors willing to build distribution and warehouse facilities on a bigger scale and lenders should be convinced that the risk is worth taking when it comes to financing new spec construction.”

Additionally, Hollingsworth noted, that there seems to be no lack of demand on the horizon from tenants who need to transport goods from the ports of Los Angeles and Long Beach along the Alameda Corridor to inland distribution centers with access to rail, surface and air transportation hubs. That’s why the focus of new industrial development has been in the Inland Empire, he said.

“Buying land and building new facilities may be easier than trying to rehab or rebuild in marketplaces that have an aging industrial base that needs to be retro-fitted or rehabbed to meet current environmental requirements, but there is still a huge demand from buyers looking to purchase new construction in these closer and more urban infill markets,” Hollingsworth said. “In urban infill markets like the City of Commerce and the City of Industry, foreign investors are buying product and fueling this demand.”

“These investors are taking a longer view of the markets and are willing to invest more with less of a return over a longer period for both urban in-fill locations and more distant areas because they know that in order to keep their own manufacturing-based economies sound, they need to have distribution and warehouse capabilities in Southern California,” he said. “We are and will remain Asia’s closest gateway to the rest of the continent, and the U.S. is still their largest consumer of imported products.”

Further underpinning demand for new construction in the basin are continued delays in the Panama Canal expansion project that experts predicted would have diverted some of the freight now handled at the ports of Los Angeles and Long Beach, Hollingsworth noted. It is two years behind schedule and there is no slackening of imports and exports at the ports.