California Apparel News

The slowing economy is starting to catch up with the industrial real estate market as the main indicators showed some signs of weakness during the first quarter of 2008. Vacancy rates in Los Angeles County rose by 1.6 percent, increasing by one basis point, according to research provided by Grubb & Ellis. New construction contributed to the increase, but so did vacating businesses. Net absorption, at 1.6 million square feet, was down about 300,000 square feet from the previous quarter, and sales and lease activity fell by 1.8 million square feet to 7.7 million square feet, marking the first decline in more than a year.

In some submarkets, such as downtown Los Angeles, industry properties have been eaten up by loft developers. Lawmakers aiming to maintain manufacturing space to help job growth are proposing an ordinance to preserve at least 80 percent of industrial land for industrial purposes. That should eventually lead to declining vacancy rates.

Among the new projects that launched during the first quarter were the Mission 71 Business Park in Long Beach, Calif., and 250,000 square feet of space at the Grand Crossing industrial park in Southern California’s San Gabriel Valley.

The South Bay region of Los Angeles County led all regions in sales and leases, with more than 2.3 million square feet picked up. However, due to rising vacancies, the net absorption was in the negative. Those moving into the area are going into less-desirable Class B properties to take advantage of lower prices, according to Grubb & Ellis brokers.

The Inland Empire’s industrial sector did post positive net absorption during the quarter, with more than $350 million in sales and leases, about a 6.5 percent increase. Demand for state-of-theart distribution space is driving relocations to the region, but at the same time, the poor economy is putting many companies in a consolidation mode. Several big companies have closed satellite facilities and moved all operations under one roof.

The slowdown of business at the Port of Los Angeles has also had a direct link to the vacancies at Inland Empire industrial parks because the area is a destination for many trucks coming from the ports.

The western Inland Empire will continue to have an advantage over the eastern section because it is closer to the main port routes. Grubb & Ellis economists said the land off Interstate 215 should see rents and property rates decline some. The lower rates are what drew large resources such as Skechers to the 215 corridor.

Retail vacancies up across the board

The lowest consumer-confidence index levels in 15 years as well as a precipitous drop in consumer spending during the first quarter do not bode well for the immediate future of retailers. Vacancy rates at community and neighborhood shopping centers (strip and enclosed malls) during the first quarter rose almost across the board, according to real estate company Colliers International.

In Los Angeles County, vacancies climbed to 3.9 percent from 3.2 percent from the previous quarter. Orange County’s went to 3.6 percent from 2.7 percent; San Diego’s went to 4.7 percent from 3.2 percent; San Francisco’s went to 4.1 percent from 2.9 percent; and the Inland Empire’s went to 7.8 percent from 5.7 percent. That amounted to negative absorption rates for most major California markets, Colliers said.

A record amount of store closures from national chain retailers contributed to the vacancies. Chains such as Pacific Sunwear of California, Wilson’s Leather, Ann Taylor and several others were among those consolidating stores. Despite the saturation level, more construction is on the horizon. About 1.9 million square feet of new retail are being built in Los Angeles County and 3.9 million square feet are underway in the Inland Empire region.

However, even in a down market, location is still king. Rents on premier fashion corridors are going up. Rents on Beverly Hills’ Rodeo Drive shot up $60 per square foot for a rate of $540 per square foot. The increase made the famed street the second most-expensive shopping district in the country, behind Fifth Avenue in New York, according to Colliers. San Francisco’s Union Square, at $490 per square foot, ranks third.

Even the popular lifestyle shopping centers, known for their outdoor and entertainment-heavy merchandise mixes, are losing ground. Lifestyle centers slipped to third place among new retail developments. Mixed-use properties were in first place, and neighborhood shopping centers were second.

According to Colliers, quoted rents at lifestyle shopping centers ranged from $15 to $90 per square foot in Los Angeles County, from $48 to $72 per square foot in San Francisco’s Bay Area and from $39 to $45 in San Diego County. Colliers researchers said rents had declined because of over-saturation and a softening in luxury and home-related retail products.

“In the coming quarters there is no disputing retail will be a tough grind, but successful concepts and strong retail properties will thrive,” said Ross J. Moore, senior vice president of market and economic research for Colliers.

“The loss of wealth felt by homeowners and a more shaky labor market are two such challenges, but the best-of-breed retailers and strong centers will survive and, indeed, prosper.”

Moore, like others, expects a better second half of the year and said tourism and job growth will be major factors contributing to improvements.