Mid-Cities industrial market firms slightly in 1992; sales activity nose-dives due to the lack of financing.

Moves and expansions from within the Mid-Cities market at the end of 1992 caused that market's year-end industrial vacancy rate to decrease from its year-end 1991 level.

Commercial brokerage firm Grubb & Ellis Co. reported that the Mid-Cities' 77 million-square-foot industrial base was 13.5 percent empty at the end of 1992, a noticeable improvement from its 14.4 percent vacancy rate at the end of 1991. That improved vacancy rate occurred despite a dip in the total volume of industrial space sold and leased in the Mid-Cities during 1992. About 11.5 million square feet of Mid-Cities industrial space was leased and sold in 1992, compared with 12.2 million in 1991. Grubb & Ellis attributed the seeming inconsistency to a lack of new construction in the market.

Jim McFadden, a Mid-Cities industrial broker for Grubb & Ellis, said that leasing represented approximately 90 percent of the market's 1992 activity. McFadden said he didn't have specific numbers from previous years, but he estimated that sales represented up to 40 percent of the total Mid-Cities' activity just a few years ago.

The story in Mid-Cities, as elsewhere, was the lack of financing for sales, he said.

"I can think of only three or four (sales) that went through in the whole year," McFadden said.

One of the few deals that did get financed was the Shoemaker Business Park in Santa Fe Springs, where Santa Ana-based Yozya Development Inc. obtained $1.2 million in permanent financing for the 92,719-square-foot park.

Bill Dugan, a CB Commercial Mortgage Banking vice president who negotiated the financing, said one reason it went through was that the park is fully leased. The deal is typical of many sales in the industrial market today: The amount of financing being sought is relatively small, and the lender wants to know the space is fully leased before committing funds.

Although surveys by large brokerage houses show the Mid-Cities market as flat, one developer claims that is an unfair assessment because such surveys focus mainly on larger buildings, where most of the problems are being experienced.

Chuck Lyons of Fu-Lyons Associates, which develops small industrial parks in the Mid-Cities, said he filled one of his parks in the fourth quarter, brought another to 91-percent occupancy and a third to 85-percent occupancy.

Lyons, whose company has developed about 1 million square feet of space over the past 12 years, said he signed two tenants up for 8,288 square feet each to fill his Paramount Industrial Center in Paramount.

Lyons also said the vacancy rate dipped to 9 percent at his Garfield Industrial Center in Paramount and approximately 15 percent at his Firestone Industrial Center in South Gate following recent leases.

While acknowledging the grim local and national real estate outlook, Lyon said small pockets of activity like his don't ordinarily show up on market surveys because most surveys track only larger buildings and larger deals than he typically transacts.

Whether the deals are large or small, the Mid-Cities market is known primarily for industrial space. Also referred to by some brokers as the "Mid-Counties" market because it includes cities in both Los Angeles and Orange counties, it is composed of Santa Fe Springs, La Palma, Paramount, Norwalk, Buena Park, Cerritos, Downey and La Mirada.

For years it was considered a strategic location because it straddles the Santa Ana (5) Freeway between East Los Angeles and Orange County. But it has been hurt by the aerospace downturn and competition from outlying areas, like the Inland Empire, that have courted distributors, which represent a big part of the Mid-Cities' tenant base.

Although some Mid-Cities buildings have been sitting vacant for two years, McFadden contends a wholesale exodus is not underway. He said Mid-Cities landlords are still doing some deals even though the next year is expected to be flat.

"Some companies are willing to move 80 miles and some don't even want to move 20 miles," McFadden said. Recently completed Mid-Cities' deals, according to McFadden, included an 80,000-square-foot expansion in Cerritos by warehousing concern USCO Distribution Services Inc., which increased its 140,000-square-foot facility to 220,000 square feet. In another Cerritos deal, Young's Specialty Foods Inc. expanded to 102,000 square feet from 80,000.

Another deal that exemplified the movement within Mid-Cities was Paramount Can Co.'s relocation to La Mirada from Paramount in the fourth quarter. According to Grubb & Ellis, which handled the deal, Paramount leased a 67,840-square-foot building for six years in a transaction valued at $1.4 million.

McFadden said tenants are motivated to lease rather than buy because acquisition financing is tremendously hard to come by and because they can rent for much less than the cost of buying, even with today's depressed sale prices.

Part of the reason Mid-Cities lease rates are such a bargain, compared to sales prices, McFadden said, is because major pension funds that own many of the larger Mid-Cities buildings are offering extremely low rates just to keep tenants in the buildings. Grubb & Ellis' survey results show many Mid-Cities industrial buildings with monthly per-square-foot rents in the 20-to-25-cent range.

"The thinking of the pension funds is that they will lease the property for three years just to bridge the gap between now and when they hope the market will turn around. You wouldn't be able to duplicate such low prices yourself if you bought the building," McFadden said.

So far, he said, the owners of big industrial buildings apparently have deep enough pockets to ride out the industry's troubles and haven't had to give properties back to the lenders.

"They (industrial buildings) haven't gotten to the point where they're like office buildings," he said.