Data Courtesy of CoStar™
Los Angeles is at the center of the 2 billion-SF Southern California industrial market and is a key industrial hub in the U.S. Demand draws from the 20 million Southern California residents and from goods entering the twin ports of Los Angeles and Long Beach, which combined handle nearly a third of all imports to the United States.
Demand for industrial properties has been impacted by losses in imports entering the ports from Asia. Loaded inbound containers declined by 25% in the past three months (from February to May 2023) compared to the same period in 2022. Consequentially, market conditions have softened. The vacancy rate has risen from 1.7% in 22Q1 to 4.2% today, with sharper increases in trade-dependent submarkets such as Vernon, Commerce, and Central Los Angeles, as well as in older facilities across the county. Some tenants are putting space back on the market as sublet available space as they downsize operations. Demand from new businesses is also lackluster. Excluding renewals, leasing volume from new leases in the first half of 2023 was 5% lower than its pre-pandemic average in the first halves of 2015 to 2019, albeit nearly 50% greater than in the first half of 2022.
12 Mo Deliveries in SF
12 Mo Net Absorption in SF
12 Mo Rent Growth
12 Mo Sale Volume
The higher amount of available space is helping tenants find new space or negotiate renewals as their lease terms end. Asking rents are much higher than three or five years ago and have grown by 5.3% during the past 12 months. However, rents grew by just -0.3% in 2023Q3—the slowest pace in more than ten years.
The slack in trade flows, augmented by the effect of higher interest rates on business formation, brings uncertainty to the short-term outlook for the space market. However, challenges in developing new industrial buildings in Los Angeles keep supply growth tame and help make existing inventory more desirable. The current construction pipeline represents 0.8% of existing inventory, compared to 2.8% in the nation. Industrial properties in Los Angeles are often demolished for redevelopment, further reducing supply growth.
Local sales activity started to moderate in 23Q2, whereas capital market conditions have been tightening across the nation since the start of 2023. Some 23Q1 sales were streamlined to avoid paying the ULA transfer tax that went into effect on April 1, 2023, in the city of Los Angeles. While valuations are declining as cap rates are rising, most recent sales have benefited from long-term appreciation. Unlike other property types, the extended period of strong rent growth has helped prevent industrial assets from selling at prices below cost.
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