Commercial market action in Mid-Cities picks up.

Rental rates stabilize as absorption sticks on plateau

Commercial rental rates appeared to be stabilizing in the Mid-Cities market during the third quarter, and companies continued to renew and relocate there. But absorption -- the amount of space moved into minus the amount of space vacated -- remained flat during the quarter.

"We've had a bit of a trade-off between product coming onto the market and product being absorbed," said Patrick Remolacio, senior marketing executive at the Seeley Co.

Added Remolacio, "There is definitely more activity. Much of it is spurred by the erosion of lease rates and tenants being aware that there are some tremendous deals out there. Owners are also eager to get their buildings leased, so the rates are down to about 1982 levels."

Remolacio further said the leasing activity in the Mid-Cities market, which is also known as the Mid-Counties market, consisted primarily of movement within the region.

However, some tenants have come in from other parts of Los Angeles County, as businesses consolidate operations.

"If a company has two operations, say, one in the South Bay and one in Orange County, it might consolidate them both in the Mid-Counties area simply for efficiency's sake. We've seen some of that," Remolacio explained.

Grubb & Ellis Commercial Real Estate Services reported that the region is still attractive for industrial companies, like Bell Sports, the Illinois-based manufacturer of bicycle helmets, which recently leased 18,500 square feet of industrial space in Cerritos. The 10-year deal, valued at $1.4 million, is typical of the types of leases being signed in the market.

The Mid-Cities market also tends to draw tenants and brokers from both Los Angeles and Orange counties, brokers pointed out. In the Bell Sports deal, for example, Jim McFadden of Grubb & Ellis Co.'s Anaheim office represented the tenant.

Jim Biondi of Grubb & Ellis said the Mid-Cities market has been faring a little better in Class A space than some nearby markets "because there is a limited supply and most of it is leased."

"The Class B and Class C space is a little different because most of it is older, and there is more of a vacancy factor there," Biondi said.

He added that rents and concessions have remained "pretty much static" in the market, which also has the benefit of being less overbuilt than some other Southland markets.

"But the economy has minimized demand, so we're still not seeing high levels of absorption," Biondi added.

According to Remolacio, landlords in today's market are more willing to renegotiate leases further in advance of their expiration dates as a means of retaining existing tenants.

"They would rather do that than have tenants be out looking at other real estate with other brokers," he said.

Remolacio added that preliminary third-quarter surveys indicate a vacancy factor of about 13.3 percent in the industrial market. But he said the term "vacancy factor" is a bit of a misnomer because the buildings are not all vacant.

"Availability factor" might be a more appropriate term because many of the buildings that are available are still occupied. Some of them have tenants who are in a Chapter 11 bankruptcy restructuring and are paying a reduced rent. But landlords often have that type of space on the market in hopes of finding a stronger tenant.

In some other cases, the building is available because it is occupied by a financially strong company that wants to downsize.

"There is a lot of 'slow pay' and 'no pay' going on right now," Remolacio said. "Landlords in many cases will try to work it out to keep the tenants in the building because it is better to get some rent than no rent."

He said rents continue to drop, but more slowly than they were declining six months ago.

Brokers reported the sales market for small buildings is slower than in some other markets. But that slowness is not necessarily due to a lack of good deals being offered.

"What we are seeing is a sub-group of people who have good portfolios of industrial product who are selling properties," Remolacio said. "These are people who typically have not sold properties in the past, but are selling them now to help their cash flow."

This means, he said, that there are actually some good opportunities to buy investment real estate at below replacement cost.

"I would assess the market as good, but comparatively speaking," Remolacio continued. "There are a lot of real users in the market, not people who are just shopping. And there are some good, strong credit companies. But there have been a lot of plans put on the back burner. Many of the companies have a wait-and-see attitude."

In the housing market, the Rancho Los Cerritos Board of Realtors reported 202 sales and 179 pending sales for September. Dollar volume of sales totaled $37.2 million.

For January through September, the board reported 1,764 sales for a dollar volume of $324.8 million. The average sales price was $184,405 for the month of September, and $184,148 for the first nine months.

The type of home most frequently sold during the period contained three bedrooms and was priced at between $160,000 and $179,999. Exactly 27 Mid-Cities homes in that category were sold during September.