— By Robert Peddicord, Executive Managing Director, CBRE South Bay —
The Greater Los Angeles (GLA) industrial market is showing stability while enduring challenges like higher vacancy rates, negative absorption and an anticipated decrease in lease rates. Markets across the country continue to adjust post-pandemic, and GLA is no exception. Nevertheless, the GLA industrial market is poised for long-term resilience, thanks, in part, to its proximity to the ports of Los Angeles and Long Beach, while LA’s large population base drives the need for warehousing.
San Pedro Bay Ports
The GLA industrial market continues to rely on the San Pedro Bay ports, the two largest ports by volume in the U.S. Although there has been an average decrease of 1.9 percent in cargo volume over the past five years, the San Pedro Bay terminal operators and dockworkers moved 16.6 million TEUs (twenty-foot equivalent units) in 2023, outpacing the TEUs moved at other ports.
Disruptions from the Suez and Panama canals may divert more U.S.-bound cargo ships from Asia to West Coast ports. The West Coast benefits from lower shipping container costs, with about a 40 percent discount shipping to the West Coast compared to the East Coast. U.S. importers, shippers and distributors are diversifying their supply chains, considering both time and cost, which may impact the San Pedro Bay and other West Coast ports, along with the GLA industrial market.
Market Performance
GLA posted a net absorption of negative 659,000 square feet in fourth-quarter 2023, an improvement from the previous quarter’s negative absorption of 2.3 million square feet. Sublease vacancies accounted for 460,000 square feet of the total negative absorption in the fourth quarter of 2023. Due to increases in vacancy and decreased activity, average asking lease rates are expected to decrease in the near term. South Bay reported the highest lease rate in GLA for the fifth consecutive quarter at $1.74 triple net, owing to its strategic location and quality tenants with high retention.
Investment, Development Trends
Investment sales in the fourth quarter of 2023 amounted to $822 million, a decrease of 48.2 percent quarter over quarter. This was influenced by selective capital investments due to rising interest rates and increased debt financing costs. Despite this, significant industrial market transactions occurred across Los Angeles. CBRE brokered the sale of a four-building industrial real estate portfolio in Compton to CenterPoint Properties for $197 million. The San Gabriel Valley recorded the largest sale of fourth-quarter 2023, totaling 993,142 square feet.
Construction of industrial spaces in GLA continues, with 7.9 million square feet of industrial development currently under construction. The largest completion was the Gand Crossing South project in the City of Industry, comprising 1.2 million square feet, fully pre-leased. Driven by port activity, South Bay boasts a pipeline of new construction that totals about 1.9 million square feet, second only in GLA to the San Gabriel Valley.
Outlook
The Greater Los Angeles industrial market faces ongoing challenges and opportunities. But its strategic positioning near the San Pedro Bay ports and the large population that drives the need for goods to be delivered through the ports will remain key factors. Activity has significantly decreased since the height of the pandemic when we saw double-digit rent growth and near-nothing vacancy rates. The current measured performance signals a more stable market that’s poised for sustainable — albeit slow — growth and long-term resilience.