In addition, Hunt points out, demand for industrial space has fallen substantially, meaning that fewer prospective tenants are in the market for the space that is on the market. What this means for landlords, he says, is that they need to aggressively go after any prospective tenant who is looking at their space because the next potential tenant might not come along for quite some time.
Building owners enjoyed much more favorable conditions a few years ago, when they could be choosier. They knew that if they didn't do a deal with a tenant who was looking at their building, someone else would come along shortly to lease the space. "That has completely reversed itself," Hunt says. Nowadays, tenants know that there is a lot of space available and that spaces have been on the market for a long time, so they are being very aggressive in their lease negotiations, he says.
Landlords today need to seize the opportunity if they have a prospective tenant who is serious about leasing the space, Hunt says. He points out that industrial REITs and large institutional owners recognized this some time ago and have concentrated on maintaining occupancy in their buildings as opposed to holding out for the highest possible rents.
"It's the owners who have four or five or 10 buildings that we really need to explain this to," Hunt says. "We need to explain to them where the market is, and let them know that they are going to have to strike a deal pretty quickly if they have someone who comes along and looks at their space, because it may be a long time before the next one comes along."
The new Grubb & Ellis report comes at a time when the demand for industrial space in L.A. County has been weakening because of the recession and the sharply reduced traffic at ports in Southern California, which drives much of the demand for warehouse and distribution space. The county's industrial market posted 3.5 million square feet of negative net absorption in the first quarter, and the new Grubb & Ellis report shows that leasing activity is down 57% thus far this year in comparison with the same period last year.
In particular, the report states, "The current state of the economy has lessened the demand for large blocks of industrial space, causing an excess of available space. As a result, the larger the size of building, the greater the shift in lease activity will be." On the investment sales side, a lack of available financing, a decrease in demand for industrial space and a gap between buyer and seller expectations are the main drivers of a decline in activity.
The new report analyzes leases and sales transactions according to building size, number of months on the market, transaction size range and other measures. It shows, for example, that leasing activity fell 40% in buildings of 25,000 square feet and smaller during the first half of this year, dropped 44% in buildings from 25,000 to 49,999 square feet, fell 48% in buildings of 50,000 to 99,000 square feet, 63% in buildings of 100,000 to 149,000 square feet and plunged 89% in buildings of 150,000 square feet or larger.
Hunt points out that one of the difficulties in establishing lease rates today is that the slump in activity provides few comparable leases. That's a big difference from two or three years ago, when there might easily have been five or 10 comps available, he says.
Despite the demand, the L.A. industrial market does not suffer from the overbuilding that has exacerbated problems in some property sectors in previous downturns, Hunt points out. "It's a demand problem, not a supply problem," he says.
In its discussions with major industrial landlords, Grubb & Ellis is finding "a sense that the industrial market is where it is going to be," Hunt says. In other words, although rents and values may continue to decline somewhat, the market may be approaching stabilization.
Everyone, of course, has the same question: "Where are we going?" Hunt notes. The economy needs to stabilize before that question can be answered, he says, but if the economy improves and if consumer spending improves along with it, the improvement should translate into increased activity in the distribution chain, which in turn will drive demand for industrial space.
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