Fourth Quarter Reports Now Available

Industrial market reports for the region are now available.

The fourth quarter is a magical time when year over year assessments make a lot more sense in that you have a full years worth of info to work with.

If I was to sum up 2010, it was an incredibly successful year in terms of industrial demand. Los Angeles returned to positive net absorption for the year and rents as a whole bottomed out.

There really is nowhere left to go but up.

When that happens will largely be based on where you are and the building class of your building. For office space, buildings are neatly categorized into Class A, Class B and Class C based on rents. Location, desirability of the building are reflected in that.

For industrial space, building class is measured on how functional the space is, meaning how efficient will a company be when it moves there. If you have low ceilings and it is far away from the freeway and is hard to get a truck into, it is not an efficient building. Landlords of these buildings should not place great hope in an economic recovery, since their building will be overlooked by any serious company.

That is not to say some sucker will not come along and overpay for their building like they did when rents increased like they did. Just one should not count on it. That was dumb money then, and we would like to think that we have learned something about the abuses of the past.

Markets with a great deal of Class A space, modern buildings with ample truck doors, high ceilings and great truck depth, will see high demand from users. This will drive up the prices as this space becomes scarce. This is where the rental rate growth and absorption will come from. It just happens that a lot of this space is in the Inland Empire.

What happens next is any ones guess but I can tell you how I see it playing out. In 2011, rents will increase for this Class A space. Developers and "investors" who have been sitting on these massive entitled land plots will again resume construction. Spec space will be constructed again.

For someone like me this seems dangerous. After all, the spec space is what got us into this mess to begin with. A lot of the investment sales that occurred in the downturn were developers who overpaid for spec space selling their buildings at a significant discount. Why would you want to relive that nightmare, especially when economic fundamentals remain so weak?

When you look at it in the context of who is going to be doing the building, institutional investors and REITS, Los Angeles does not seem risky. Many of these companies got out of what they perceived to be the risky markets and doubled down on much of the "core" LA buildings.

These REITS now have the expectation to make some money, their stock has been rising and investors are going to start demanding that action be taken in order to justified further share price growth.

This will lead to less risky development, which means to favor LA over say Atlanta or Dallas.

The desire for safety stands against every great and noble empire, and I think after three years of shrinking, we will see the empire building start again.