By Robert Flores, Senior Vice President, CBRE
Not too long ago, industrial real estate was generally viewed as an obscure and often unpopular subset of commercial real estate. Instead of owning a concrete box, many investors and developers were drawn to the flashier structures in Central Business Districts and hip submarkets. Fast forward a few short years, and industrial has firmly taken center stage for many who might have previously shunned the sector. The Greater Los Angeles area is one of the beneficiaries.
The Greater Los Angeles region is the second-largest metro in the U.S. and is home to some of the nation’s most critical infrastructure. With the ports of Los Angeles and Long Beach accounting for more than 40 percent of the country’s inbound container traffic and Los Angeles International Airport serving as a major gateway for passengers and air cargo, the local industrial market is ground zero for industrial users.
At the close of the second quarter, the Greater Los Angeles industrial market totaled more than 1 billion square feet of rentable space with a vacancy rate of just above 1.5 percent, according to our CBRE research. Based on current activity levels and leasing velocity in the market, that number is likely to go even lower by the end of the third quarter.
Recent noteworthy transactions in the market include Lief Labs, a manufacturer and product development innovator of dietary supplements, leasing 111,260 square feet of industrial space in Valencia, as well as Pelican BioThermal leasing 54,060 square feet in the city.
The region continues to be driven by an extreme supply and demand imbalance and a critical shortage of available land for new construction. Adding to the pain, the local market is experiencing a tectonic shift from its roots as a traditional transportation and logistics hub to a more balanced market with a much broader mix of users. Some of the more active user groups in the market today include aerospace and defense contractors, rocket manufacturers, notable cosmetic brands, electric vehicle companies, and various food and beverage groups. These user groups have largely sought out higher-quality assets in more strategic parts of the market and have shown a tolerance for higher rents than traditional users have.
Zooming in further, the South Bay industrial submarket continues to set the pace for the broader region. With an industrial base of about 220 million square feet of rentable space and a vacancy rate of a mere 0.7 percent, opportunities are scarce for users looking to expand their footprint or relocate within the market. Tenants are drawn to the South Bay specifically because of its proximity to the ports, as well as accessibility to a deep, diverse labor pool and adjacency to executive housing communities in the beach cities and West LA.
As ecommerce demand intensifies and businesses rush to shore up stock before more supply chain disruptions, industrial leasing activity in the South Bay has totaled 6.6 million square feet year to date. This is more than any other submarket in Greater Los Angeles, according to our latest research.
A surge in the South Bay’s lease rates in the first half of 2021 has led many South Bay users to explore neighboring submarkets. This has resulted in substantial rent growth across the broader market and into the Inland Empire. Certain parts of the South Bay have seen upwards of 30 percent to 40 percent rent growth year to date, by some estimates. While many are wondering if this momentum can sustain itself, Los Angeles is uniquely positioned to continue this path for the foreseeable future. The frenzy of tenant activity in the market and robust investor demand seem to validate this trajectory.