LA County's Industrial Market Is No Longer 'Tight as a Drum!'

Strategic Downsizing in 2023 Drives Industrial Space Availability in 2024

January 2024 | J.C. Casillas , Managing Director, NAI Capital Commercial Research

MARKET OVERVIEW

The turnaround in LA County's industrial market continued in 2023 as vacancy shifted from being 'tight as a drum.' Completed construction added close to 5.2 million square feet in 2023, marking a 22.8% increase from 2022 and contributing to a 200-bps rise in the vacancy rate year over year, now standing at 4.2%—the highest since Q4 2013. New developments and the increased supply of industrial space are extending leasing times. Over the past two years, LA County added approximately 9.4 million square feet of completed construction to the market, while absorption resulted in a negative 17.5 million square feet during the same timeframe, indicating a shift in the industrial market's trajectory.

Developers raced to meet the demand for warehouse space spurred by e-commerce, adding much-needed capacity. According to the latest figures from the Ports of Los Angeles and Long Beach, combined TEU cargo volumes—a significant driver of warehouse space demand in SoCal—declined by 13.7% year-to-date as of November. Currently, 6.3 million square feet of industrial space is under construction, representing a 16.7% drop from the prior quarter but only a 0.9% decrease compared to last year.

Strong rent growth has been the primary driver in the push for new construction. However, the average asking rent at year-end dropped by 3.4% from the previous quarter to $1.68/SF triple net, maintaining a mere 0.6% rise from Q4 2022. On the sales side, year-to-date sales volume on a square foot basis declined by 35.5% from last year, with the average price per square foot down 13.6% from 2022.?

TRENDS TO WATCH

Lower leasing velocity raises concerns for developers, investors, and landlords while providing tenants opportunity in negotiating new leases in 2024. Nevertheless, e-commerce thrives as the warehousing of goods sees an increased number of options. In 2023, companies that actively reduced excess warehouse space as part of the pandemic supply chain hangover left the industrial market in 2024 with an all-time high in vacant sublease space. This has resulted in a significant increase in the amount of vacant sublease space on the market, up by 17.5% from the previous quarter and by 365% from the same time last year, totaling approximately 5.7 million square feet. Moreover, 11.5 million square feet of total vacant space were added to the market in 2023. This abundance indicates that companies with warehousing requirements now have a variety of options.

With lower economic growth, the increase in available industrial space offers tenants more choices, as prices and elevated interest rates have weakened industrial building leases and sales. Leasing volume has experienced a decline of 5.5% compared to a year ago, totaling 33.7 million square feet year-to-date. Sales dollar volume dropped by 47.9% in the same timeframe. In Los Angeles County, the average cap rate for industrial properties in 2023 increased by 50 basis points from the previous year, averaging 4.9%—noteworthy considering cap rates peaked at 8.3% in 2010 during the Great Recession. The combination of elevated interest rates, a slowing economy, and weakening demand will continue to have a dampening effect on pricing heading into the new year, with 2024 focusing on exploring pricing options.