The South Bay Los Angeles industrial property market steamed into the first quarter after posting nearly 1.4 million square feet of net absorption – the biggest three-month total since 2004 in Colliers International’s quarterly surveys – and ahead of new data showing a surge in January trade through the twin ports of Los Angeles and Long Beach.

“The chief reason behind the strong net absorption was that three new buildings totaling 810,000 square feet were completed and leased in the fourth quarter,” said Colliers Executive Managing Director John Hollingsworth, who is based in the firm’s El Segundo office and oversees industrial brokerage throughout Greater Los Angeles.  “Otherwise, businesses in the South Bay that are planning for growth generally are frustrated with the lack of available space.”

The fourth quarter’s strong absorption – which represented 60 percent of the total market’s gain in 2016 – was nearly offset by the 1,314,500 square feet of new construction that landed on the market in Q4.  That pushed up the South Bay’s total inventory by about 0.7% to 213.7 million square feet.  South Bay has 16% of the total space in the Los Angeles Basin and is the third-largest industrial market in Southern California.

There were two buildings developed by the Trammell Crow Company in Compton totaling about 1.1 million square feet that were completed in the fourth quarter.  One of the buildings was leased by UPS.
Even with the added inventory, demand drove down the vacancy rate 10 basis points to settle at 1%.  Vacancy is tightest in the Gardena/Harbor Freeway submarket at 0.5% and Long Beach/Harbor Cities at 0.8 percent.

“Some of our users will find relief in the 1.2 million square feet of new supply that’s due for delivery this year,” said Colliers Vice President Charles Littell.  “But the overall market is so tight that even the most marginal space is drawing multiple offers.  Overall, asking lease rates are increasing annually by double digits, and some tenants renewing leases are seeing rent hikes of up to 45%.”

On the heels of Colliers’ fourth-quarter analysis, the Port of Los Angeles reported its busiest January in the port’s 110-year history.  Dockworkers handled 826,640 20-foot equivalent units (TEUs), which was a 17.4 % year-over-year increase, port officials said.  The Port of Long Beach reported that it handled 582,689 TEUs in January, an 8.7% hike from a year ago.

Port officials attributed the high container volume to retail stores replenishing inventories after the holidays.  L.A. port officials said the high January traffic also was due to a spike in exports, up 28.7% from a year ago, and cargo ships from Asia calling ahead of the Jan. 28 start of the Lunar New Year.

The average triple-net rental rate of 75 cents per square foot is up more than 27% in the last four years and is projected to continue to climb as the shortage of available land severely limits new development.  

Combined sales and leasing activity in South Bay in the fourth quarter totaled 3.3 million square feet with nine building sales and 55 leases of space that totaled more than 3 million square feet.

Cap rates continue to remain tight in Los Angeles County, averaging 5.4% in Q4 2016. Investors are expected to continue their focus on prime infill locations.