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# Industrial real estate sees significant demand
- URL: https://www.smdp.com/industrial-real-estate-sees-significant-demand/
- Published: 2006-10-18T15:00:00.000Z
- Updated: 2026-10-25T01:09:17.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By JODI SUMMERS*

The demand for industrial warehouse and distribution space has brought the national industrial vacancy rate down to a five-year low of 9.7 percent — and a local vacancy rate of about 5 percent. The average vacancy rate in the nation’s 30 leading distribution markets at mid-year was down.8 percent to a solid 8 percent from the mid-year 2005 rate of 8.8 percent, according to the most recent Commercial Real Estate Outlook from the National Association of Realtors Commercial Alliance.

“Markets like Southern California, which are heavily dependent on distribution activity, have done well and will continue to do so,” said Jim Sullivan, principal at the real estate securities research firm Green Street Advisors.“The improving economy will only help that situation, which is already strong.”

In 2006, a record 204 million square feet of space will be added to the nation’s industrial real estate market. Much of this new space is designed to meet the needs of specialized warehousing and distribution industries and complement the new trend of just-in-time manufacturing — producing the necessary items in necessary quantities at the necessary time.

“Demand has progressively moved up, and last year we had record absorption. However, new product deliveries have been at 50 percent to 60 percent of what is typical for a recovery year. We are seeing less space coming onto the market,” said Eugene F. Reilly, executive vice president and president of North America for AMB Property Corp., a San Francisco-based industrial real estate investment trust (REIT).

Locally in SoCal, much of the warehousing is leveled and rebuilt once it becomes obsolete. In smaller markets where land values are lower and site remediation concerns are minimal, old industrial space is converted to mixed use plus loft space. New industrial development moves an exit down the freeway. The overall industrial vacancy rate in the third quarter of 2006 rests at 9.7 percent and is predicted to stay at this level until the end of the year.

National industrial vacancy rates have not been this low since 2001\. Port markets, both traditional and inland, are experiencing the greatest demand for industrial space. The nation’s busy ports in Southern California are also fueling demand in major inland ports from Riverside to Albuquerque, N.M.

“While construction has picked up, it’s still very disciplined; demand still outpaces supply. And vacancies are still declining, but not by as much. At this point it takes a really strong demand to drive them down,” said Leonard Sahling, first vice president of the ProLogis Research Group.

The demand for specialized distribution space that cannot easily be met by existing stock has increased, and has caused an upswing in new build-to-suit industrial real estate. In addition, there has been an increase in the development of new speculative properties in areas of high demand in SoCal and South Florida.

As of the third quarter of 2006, the high rent markets include San Diego ($9.71 per square foot), Orange County ($8.86 per square foot) and Los Angeles, ($8.15 per square foot).

Rent growth in 2006 is forecast to be approximately 1.5 percent, down from the 2.9 percent seen in 2005\. Rent growth next year is predicted to increase because of supply and demand.

Southern California will continue to be the high-rent district for industrial space. By the end of 2007, gross rent in San Diego is expected to be $10.50 per square foot.

Through the third quarter, $23.6 billion worth of industrial real estate traded hands. Pricing has increased, while cap rates have essentially remained flat. Overall cap rates for industrial properties are resting at 7.2 percent, down from the 8.5 percent in 2004\. Pricing has increased in 2006, from close to $65 per square foot to $76 per square foot.

Large institutions, such as life insurance companies and pension funds, have accounted for more than one-third of the industrial property sales volume through the first three quarters of 2006\. In the Midwest, institutions have accounted for more than 60 percent of industrial transactions. REITs have in been particularly active buyers of industrial real estate in the Mid- Atlantic region, where they account for almost 50 percent of all industrial investment transactions year-to-date.

“The industrial REIT group is populated by some extraordinarily excellent companies, but they are excellent for different reasons,” said Sullivan. “ProLogis and Catellus, for example, are great developers: An improving economy, leading to more industrial demand, leads to new building demand, which plays to their strength. Duke would be in that group as well. Liberty is another name I would throw in. Centerpoint is maybe qualitatively the best real estate company in terms of development, redevelopment, leasing and property management... Finally, AMB is a company that has a portfolio concentrated in the key industrial markets: Seattle, Southern California, Atlanta, Dallas, Chicago, Northern New Jersey and Florida. They own property in the right places.”

The Australians have had an appetite for industrial property recently and accounted for the bulk of 2006 foreign investment.

The highest prices being paid for industrial buildings outside of Manhattan are in Northern Virginia ($193 per square foot), San Jose ($178 per square foot) and Las Vegas ($159 per square foot). While industrial transactions in the San Jose market are in flex, the Las Vegas market, which is a major trade and distribution hub, is more warehouse and distribution oriented.

For information on Southern California investment properties, there is a great Web site at www.SoCalInvestmentRealEstate.com.

Jodi Summers is director of the investment division at Boardwalk Realty. Contact Jodi at (310) 309-4219 or, or visit her Web site at www.santamonicalandmarks.com.

*Originally published in the Santa Monica Daily Press print edition on October 18, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/101806.pdf?ref=smdp.com)