GlobeSt.com Exclusive: Speculative Development More Prevalent
Last Updated: October 8, 2015
Speculative Development More Prevalent
By Natalie Dolce | Inland Empire
With the lack of industrial inventory in the Los Angeles and Orange County markets, the industrial market in the IE, particularly the demand for distribution buildings, remains white hot, and we expect this trend to continue into the fourth quarter,” says Illsley.
RIVERSIDE, CA— Gross activity for manufacturing/distribution buildings for the East Valley Market in Southern California’s Inland Empire in the third quarter was just under 9.2 million square feet. That is according to a recent report from the Riverside office of Lee & Associates.
GlobeSt.com received an early exclusive copy of the report, which notes that investment purchases and lease renewals accounted for 68% of that total amount. This trend continued on the heels of “the great absorption performances in 2014 of 11.4 million square feet and 2013 at 14.8 million square feet,” says the firm.
Demand remains high for distribution buildings as there are more buyers and potential tenants in the market than available spaces, the report says. “Absorption is expected to continue to be steady throughout the remainder of 2015, tempered only by the lack of any available product. Third quarter 2015’s absorption figures were just over 2.9 million square feet, bring YTD absorption to 10.4 million square feet.”
The firm’s Riverside president David Illsley says that “With the lack of industrial inventory in the Los Angeles and Orange County markets, the industrial market in the IE, particularly the demand for distribution buildings, remains white hot, and we expect this trend to continue into the fourth quarter.”
Vacancy rates increased in the third quarter to 5.68%, primarily due to the 4.8 million square feet of new construction completed in the quarter, with two buildings (1.2 million square feet) being delivered vacant, the report says. However, with such strong demand in the marketplace, these buildings are expected to lease very quickly.
The remainder of 2015 is projected to show a stable vacancy rate, given continued demand and a projected moderate increase in new supply, says the report. Speculative development is becoming more prevalent, as demand continues and prices continue to rise, however due to the demand in the market, the impact on vacancy rate is expected to be minimal.
Quality product, the report says, is still extremely difficult to find and obsolescent buildings continue to be purchased for land value, and slated for demolition and development of new projects.
Average asking sales prices per square foot increased in the third quarter with the supply of buildings offered for sale remaining limited, says the report. “The market upswing in actual sales prices started in 2014 in the East Valley, and sales prices are expected to show a steady upward trend throughout the end of 2015 due to the competitive marketplace, cap rate compression and rising lease rates.”
The base for the third quarter under construction, represented 12.9 million square feet under construction, with 96% of the total in the 200,000-plus-square-foot range, a 7% decrease over the previous quarter. Seven buildings completed construction in the East Valley in the third quarter, with nine new buildings projected to be completed in the fourth quarter of 2015. New construction on both a build-to-suit and speculative basis will continue in the region for large, big-box type product.
The third quarter summary also found development interest will formulate into new construction on smaller product as well, as rental rates and sales prices are beginning to justify new construction. “The area will remain a new construction hot spot for some time.”