Industrial vacancy rates shrinking

Developers are adding distribution space in the Inland area but not a lot of buildings to house a small- or medium-sized factory.

Big-box warehouse users and manufacturing companies looking for smaller industrial buildings are finding a real estate market that is tightening, a series of recently released market reports found.

The overall vacancy rate for all industrial buildings in Inland Southern California, from large distribution centers to small factories, continued to decline in the fourth quarter. Several studies by brokerage firms and researchers estimated it at between 4.8 and 5.4 percent.

That would represent a substantial decline. According to a year-end report from real estate research group CoStar, the vacancies in this sector have dropped from 6.1 percent at the end of the third quarter and from 6.2 percent at the close of 2013’s first quarter, a decline of close to 20 percent in less than a year. CoStar’s report estimates the current vacancy level at 5.4 percent.

That might be squeezing out some smaller manufacturers who are looking for a home, people in the industry say. Last year saw several big distribution centers under construction, but not many facilities for a small- or medium-sized factory.

“We’re seeing some strong absorption, but the key is, the developers are not building replacement inventory for 100,000-square-foot buildings or below,” said John Boyer, executive vice president for the Ontario office of NAI Capital.

The tightening market for existing smaller properties comes at a time when some independent companies seem interested in buying. The number of small businesses interested in a 504 loan, a U.S. Small Business Administration-backed financing plan that allows entrepreneurs to own the facilities they operate, was up for most of 2013.

However, some of those business owners could be thwarted by the lack of inventory. Boyer said there is little space in the Ontario area’s warehouse hub for a smaller factory but some infill space farther east.

“Now developers are starting to do an ‘Aha’ ” about the need to build new facilities, Boyer said. “As the economy heals, the users who survived are looking to buy.”

Rick John, senior vice president at Daum Commercial Real Estate and president of the Inland Empire and Orange County chapter of the Society of Industrial and Office Realtors, said there’s been no shortage of new construction larger than 100,000 square feet in the area.

“For smaller buildings, there’s demand without supply,” John said. “Our market has not put any product out for these smaller buildings in the last five years.”

Part of the issue is price, John said. Developers frequently still believe the risks don’t justify the investment.

Also, part of the issue is traced to residents who don’t want industrial properties in their areas, said Bruce Springer, a senior vice president with Lee & Associates.

“The roadblock is the entitlement process, from California and from cities and counties,” Springer said. “It’s onerous, and it makes it difficult to build manufacturing buildings.”