'2015 Momentum To Carry Into 2016'

Economic Overview

        2015 was a strong year for the South Bay / Long Beach Industrial Real Estate Market and this trend will extend through 1Q 2016.  Lease rates will maintain their upward trend as the vacancy rate will remain hovering at a historic low near 1%.  Land prices will continue to increase for development, especially since an NFL Football team will be returning to Los Angeles. The Rams will be moving to the City of Inglewood and will be building a stadium on the former Hollywood Park racetrack.   In Downtown Long Beach and the greater South Bay, we are seeing older buildings being overhauled or demolished for new ones.  Many of the remaining land sites in our market are either contaminated or in the process of remediation, leaving nowhere left to build. This year we saw the last C-17 leave the production line at Boeing’s Long Beach facility and we saw the next generation of aerospace move in as Virgin Galactic relocated its headquarters to Douglas Park, at the Long Beach airport.  With the announcement of Toyota and other companies leaving California and heading towards more business friendly states such as Texas, many thought more companies would follow. However, we saw the succeeding generation of companies establishing roots in California.  The LA Basin has become home for trend setting companies such as SpaceX, Virgin Galactic and Faraday Futures. This demand for space has surpassed our available supply, causing prices to increase and developers to scramble to deliver space.  Currently, the South Bay has 741,832 SF under construction for 4Q 2015.

The direct industrial vacancy rate in the Long Beach/South Bay marketplace decreased slightly from 1.0% in the 3rd Quarter 2015 to 0.9% in the 4th Quarter 2015.  The vacancy rate this time last year was 3.1%; which shows the drop in available space over the past year.  Asking rents increased again in the 4th Quarter to $0.75 PSF, from $0.73 PSF the previous quarter, as the supply of available buildings diminished by year end.  The average sale price increased in the 4th Quarter 2015 to $137 PSF versus $126 PSF in the 3rd Quarter 2015.  According to CoStar Group, “Total year to date industrial building sales activity in 2015 is up compared to the previous year. In the first nine months of 2015, the market saw 338 industrial sales transactions with a total volume of $2,206,303,066.  The price per square foot has averaged $129.32 this year. In the first nine months of 2014 the market posted 307 transactions with a total volume of $1,668,385,897. The price per square foot averaged $103.46. Cap rates have been lower in 2015, averaging 5.89%, compared to the first nine months of last year when they averaged 6.33%.” 

The UCLA Anderson Forecast sees the national and California economies being healthy for the next couple of years.  However, there is concern regarding the economic turmoil in China’s economy and its possible effect on the Los Angeles’ basin economy.  According to William Yu, Economist for the UCLA Anderson Forecast, states: “…China’s economy, housing market, stock market and currency are all in trouble…The implication for Los Angeles is that China’s turmoil might reduce the growth of Los Angeles’ export and tourism [business], but Chinese investment in Los Angeles real estate will persist due to better and safer expected returns in the U.S. Los Angeles’ housing market, despite becoming more expensive and unaffordable, is not in a bubble. Its housing prices are highly unlikely to bust this year or next.”  This impaction to exports has yet to be seen as the demand for industrial space continues into the 1Q 2016.  We could see a trickle-down effect of China’s economy take shape and form in our economy later in the year as we approach Peak Season at the Ports of Los Angles and Long Beach.  

Lee & Associates sees several trends that will shape the Industrial Sector for Long Beach/ South Bay in 2016.  The impact of cheap oil and its’ record descent has gravely hurt our local businesses that service that industry.  The Oil Industry was a heavy contributor to helping our local markets recover during the Recession of 2008 when Oil was above $100 a barrel.  However, if Oil continues to stay low and hover at or below $30 a barrel, we will see more consolidation and lost jobs in that industry, which is an integral part of our local economy. We are also experiencing more large institutional landlords not taking their portfolio sales to market, as they solicit other institutional landlords internally for quicker deployment of capital and fulfillment for investor demand.  This trend is concerning, as Tenants/User will be limited on their choice of landlords to work with in the Class A Industrial Market.  Foreign investment will continue to grow in Industrial Real Estate since it offers low risk and higher return opportunity.  If this trend persists, we will continue to see sale prices increase.  This will be a great opportunity for Property Owners to put their properties up for sale to capture historic sale values.  Despite the Federal Reserve Board raising interest rates this quarter, interest rates are still historically low and these low rates will continue to encourage business owners to take advantage of the favorable market conditions. As seen last quarter, Industrial properties for lease or sale will be difficult to find while newer facilities will be built to support fulfillment centers and the move towards electronic retailing.  Despite the background noise globally, locally the market signals are strong heading into 1Q 2016.  Contact your local Lee & Associate specialist for more information regarding your submarket.

Message me for a full copy of my 4th Quarter 2015 Report.