Demand for Industrial Space Builds in County

It lacks the prestige of Century City or the skyscrapers of downtown Los Angeles. But aptly named Commerce boasts a lower vacancy rate--less than 4%--than most of the area’s prime business districts.

The tiny city, which straddles the Santa Ana Freeway southeast of downtown Los Angeles, and its commercial real estate market are booming as a result of robust demand for industrial and distribution space. The market has been further squeezed by a shortage of available land and little new construction, forcing many businesses to renovate older, obsolete buildings or move elsewhere. The conditions have boosted rents by 10% in the last year.

“We really can’t go out of our way to attract new businesses because there is no space,” said Dayle Frisk, executive director of the Industrial Council of the City of Commerce. “We know people are going to places like Ontario. But there’s nothing we can do.”

The tightness of the industrial market in Commerce is representative of conditions throughout Los Angeles County. In fact, demand for industrial space is so strong--and new supply so scarce--that a recent study by the Los Angeles Economic Development Corp. said that the county is building only half of the new industrial space it needs--about 21 million square feet--on an annual basis.

In Commerce, large chunks of new space are hard to find and get scooped up quickly. The vacancy rate for Class A space--the newest and highest quality--has fallen from about 5% to below 1% in the last three years, said John Privett, a broker at CB Richard Ellis.

“In certain ranges [above 100,000 square feet], there are no suitable alternatives,” Privett said. “All the [close-in] markets are very tight.”

Commerce is an older industrial city, where spacious, modern industrial parks are far and few between. But what Commerce lacks in new space it more than makes up for with its central location, easy freeway and rail access and low taxes. As a result, nearly 2,000 businesses, employing about 55,000 workers, are jammed into the city’s 6.6 square miles.

After watching vacancies rise and rents stagnate during the early 1990s, the city has enjoyed a dramatic turnaround in recent years. The sales price of new buildings has ballooned nearly 25% in the last year as the price of land has nearly doubled to $12 a square foot.

The tight market finds many Commerce firms beginning their search for new space one year before their current leases expire, instead of the customary six months, said CB Richard Ellis industrial specialist David Fults.

“People are forced to sign leases for exorbitant rates because they don’t have any options,” Fults said. “The owners have the advantage in this marketplace.”

The area’s largest landlord, an affiliate of real estate giant Trammell Crow, which manages and owns about 8.4 million square feet of distribution and manufacturing space, has watched the average vacancy rate for its properties plunge from about 8% in the early 1990s to about 1.5% today.

Rooney Daschbach, vice president of Trammell Crow Company So. Cal. Inc., said he recently had 15,000 square feet become available. The first two companies that toured the space made offers on the spot--at full asking price.

“It’s definitely a strong time,” said Daschbach, whose firm has been able to hike rents an average of 10% annually in the last three years.

Paul Sablock, a real estate broker with Seeley Co., said that new construction and a slower-growing economy will open up more space--but not for at least 18 months.

“It hasn’t slowed down yet,” said Sablock, who is seeing the highest leasing rates ever in the 20 years he has worked in Commerce.

The shortage of available space has prompted some firms to renovate older space that would have been torn down or left vacant in most markets.

“We have been very successful in rehabbing quite a few buildings . . . to comply with [the building] code and gotten manufacturers [to move] in,” said Justin McCarthy, assistant executive director of Commerce’s redevelopment agency. But the city remains short on available property.

Buoyed by rising rates and low vacancies, some firms are beginning to develop the few empty parcels that remain. Among the new projects is a large--330,000 square feet--building in the eastern section of Commerce. Trammell Crow also plans to build 100,000 square feet of additional space on Slauson Avenue next year. Daschbach predicts tenants will commit to the space before it is completed.

But many firms can’t wait for new buildings to open. One cold storage warehouse and distribution center that needed to expand its Commerce operations by more than 50% to 160,000 square feet had to move six miles down the Santa Ana Freeway to Santa Fe Springs, said real estate broker Fults.

“There was nothing up here,” Fults said.

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Real Estate Trends

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City of Commerce Industrial Net Absorption (in millions of square feet)

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City of Commerce Industrial Vacancy Rates

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Note: Net absorption reflects the gain in rented space. Vacancy rate is the total vacant square footage divided by total rentable square footage in all existing buildings. Sublet space is space rented by primary tenants that is vacant and available for sublease.

Source: CoStar Group Inc.