With limited inventory and historically high values and rental rates, it’s safe to say the Los Angeles industrial market is enjoying an all-time high.
David Freitag, DAUM Commercial Real Estate Services
There are several factors contributing to ongoing strength in the market, including a healthy appetite for acquisitions, strong tenant activity and creative solutions to adapt to supply constraints and maximize ROI.
Industrial buyers continue to be active in Los Angeles, even with tightening availability and compressing cap rates. The fact is, there is still tremendous value to be found in this gateway city. Interest rates remain low, and those looking to acquire properties know that the sooner they buy, the better.
Conversely, sellers are not especially eager to dispose of properties in the current market, based primarily on the challenge in finding acquisition-worthy assets. Specifically, owners seeking 1031 exchanges are finding it increasingly difficult to identify properties to trade into.
That said, values are high enough that some owners are selling and choosing to simply pay taxes on capital gains or look to other markets for product to acquire. For example, Daum recently helped a seller dispose of a property in Los Angeles and reinvest those funds into an asset in Cleveland, Ohio, at a 7 percent cap rate. With LA cap rates hovering around 4.5 percent, this trade delivered tremendous value to our client.
Industrial leasing activity is healthy in Los Angeles, with much of this driven by e-commerce giants who are seeking the opportunity to be closer to their customers to bolster their last-mile services.
This is contributing to a shift away from tenants, such as garment companies, formerly a staple in LA’s industrial market, but already shrinking due to outsourcing.
Instead, major companies like Best Buy, which recently leased close to 500,000 square feet in the Brickyard in Compton, and Amazon, which has occupied several large buildings in central LA and the Inland Empire, are entering the market.
Leasing activity is also changing geographically. As Downtown LA’s industrial product is increasingly converted to creative office, retail and multifamily uses, many industrial tenants are moving farther south and farther east for more functional space at lower costs.
Daum recently marketed a 125,000-square-foot distribution warehouse in Vernon that had been vacated by Whole Foods. Rather than seek out one large tenant, our team decided to divide the space and lease it to smaller companies who are finding Downtown buildings to be functionally obsolete. Ultimately, we brought the building to 100 percent occupancy with a total of five smaller produce-oriented tenants — many of whom were relocating from Downtown.
Los Angeles’ industrial product is in high demand with limited supply, and this is likely to remain the case for the next several years.
With the market constrained and a lack of suitable product Downtown, potential buyers and tenants will need to be responsive and open to geographic changes.
Owners who see the advantage of selling at this time are faced with the tough choice of either finding replacement properties for investment in this market or elsewhere, or paying the taxes to ensure they benefit from historically high values.
Despite some challenges, as these shifts occur, the LA industrial market will continue to flourish, delivering strong ROI to those who invest here.
— By David Freitag, Executive Vice President, DAUM Commercial Real Estate Services. This article first appeared in the June 2017 issue of Western Real Estate Business magazine.