The Los Angeles/Southern California industrial real estate market ended the first quarter of 2014 with the lowest vacancy since early 2008, at an average rate of 3.8 percent. This latest positive trend in activity signifies a full recovery by the end of the year.
Asking rents have climbed dramatically over the past 36 months. The Los Angeles industrial market rents have increased by as much as 20 percent to $.55 triple net, from a low mark of $.44 triple net in the first quarter of 2011. They are predicted to grow another 5 percent by year end. This rental increase is due to the robust economic recovery in Southern California, in addition to major tenants’ pent-up demand and a lack of supply for Class A distribution space. To enhance this recovery, the region’s unemployment has dropped to a low of 7.5 percent, or 50 basis points lower than the first quarter of 2013.
Los Angeles/Southern California has the largest industrial base in the nation, with more than 1.6 billion square feet of product in all classes. Coupled with the lowest vacancy rate nationally at 3.8 percent – not to mention 18 consecutive quarters of positive net absorption – and this market is extremely attractive to all buyer types,especially investors with long-term hold requirements.
The demand for good quality product is driven by the ports of Long Beach and Los Angeles. These ports haveaveraged more than 14.5 million TEU’s (20’ long shipping containers) per year over the past four-plus years, making this region the busiest in the nation. With all this TEU traffic, these ports will be implementing an improvement cycle over the next three years. During this time, they will spend up to $700 million for more efficient storage capacity, transportation networks and loading terminals.
More than 16 million square feet of product is currently under development to keep up with this industrial demand. Completion dates will be staggered throughout the next 18 months. The movement of goods to accommodate business is vital to the economic prosperity of the region, while technology is dictating what types of buildings to develop for this demand. Thanks to the advent of scanning devices, goods can be tracked with complete accuracy and shipped immediately to the customer. An e-commerce warehouse is a great example of this kind of distribution strategy, which makes the supply chain efficient and inexpensive.
As we move forward into this robust market, we will see Class A industrial development product dominate the landscape for leasing activity in the range of 500,000 square feet to 1 million square feet. The smaller infill or redevelopment sites in Los Angeles and Orange County will also be highly pursued by tenants, relative to their proximity to the ports and their reduced cost of transportation.
We are seeing capital markets investors buying Class A industrial product above replacement cost, and at cap rates below 5 percent to get a foothold into this dynamic investment real estate space. The Class B and C products are still actively trading. However, these classes are being watched with a careful eye on their viability to be repositioned at a later date.
The industrial real estate market in the Los Angeles region is now a better investment than it was five years ago. These recent trends predict it will be the premier location to own industrial real estate in the future.
By Tim Joyce, Senior Vice President, Director of Capital Markets for PM Realty in Irvine, Calif. This story originally appeared in the June 2014 issue of Western Real Estate Business magazine.