Greater LA’s Industrial Real Estate Enters a New World
By Kurt Strasmann, Executive Managing Director, CBRE
Industrial properties have been in high demand in recent years both nationally and, particularly, in Southern California and the Greater Los Angeles area. Our region is a strategic hub for goods coming from all over the world, especially Asia, and boasts the necessary infrastructure to store and deliver product regionally and throughout the nation. Greater LA is also a major consumer hub. About 50 percent of product coming through the LA and Long Beach ports remains in the region.
Our first-quarter numbers emphasize LA’s strong industrial fundamentals prior to COVID-19 taking effect. These numbers have put the market in a strong position to weather the recession, which we expect to be short. The 1.7 percent overall vacancy rate in the first quarter represented the limited supply and high demand for
industrial space within the region. The diverse tenant base has created further market resiliency with occupiers in logistics, food and beverage, entertainment, manufacturing and a broad array of other industries. Going forward during these extraordinary times, we do anticipate an increase in vacancies and decreasing tenant leasing activity through at least the fourth quarter. Until we return to a more normalized state, we need to expect decision-making to be on pause for everything except mission-critical transactions and lease renewals.
Looking at rents and sales in the sector, it is a bit premature to make the call. In regard to sales prices, we don’t expect to see a major decline as industrial product in infill locations remains the safest commercial property type in both the short- and long-terms. There are also high barriers to entry in infill locations, which means investors will continue to look to place capital in this product and location sector. This has been – and will be –most evident in niche categories, such as cold storage and last-mile locations, which are experiencing particularly high demand from the food and beverage sectors.
While the short-term outlook for industrial real estate is to the downside, the long-term effects of COVID-19 may ultimately boost demand for this region’s real estate class in a couple ways. In order to ensure inventory levels are adequate to quickly meet demand, retailers will insist that vendors keep higher amounts in stock, thus increasing the demand for warehouse space. COVID-19 and its associated quarantines are also creating new online consumers, which will further increase ecommerce’s share of total retail sales. Shifting consumer purchasing preferences toward ecommerce has consistently increased demand for warehouse space in the Greater Los Angeles, Orange County and Inland Empire regions. Since 2013, ecommerce-related businesses have accounted for 38.6 percent of regional gross activity, or 215 million square feet. Unwavering demand for warehouse space in 2019 from ecommerce-related users pushed activity to new heights, accounting for 44.8 percent of total gross activity in the area. This trend will continue. As it has been for more than a decade, ecommerce will once again be the biggest catalyst for both demand and change in industrial real estate over the next cycle.
— This article originally appeared in the May issue of Western Real Estate Business.