Los Angeles Commercial Industrial Market Report as of March 10, 2024

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This is Manuel Angeles with Exp Commercial.

Here is an update on the current Commercial Industrial Real Estate Market in Los Angeles County as of March 10, 2024:

Los Angeles industrial is an attractive asset type for institutional investors and public REITs because private owners, many of whom are entering retirement years, have been divesting well-located assets for more than a decade. However, the impact from higher interest rates, weaker market fundamentals, and ULA transfer tax led to a 40% decline in sales volume in 2023, and investors remain cautious in 2024.

Some of the few large sales that closed in recent months with assets valued over $50 million have comprised properties with a combination of ample remaining lease-term at an attractive cap rate and future redevelopment opportunities. For example, Rexford Industrial REIT acquired a 1 million-SF brewery in Irwindale from Pabst Brewing Company for $120 million ($120/SF) in October 2023. The tenant is committed to the property for eight years with long-term extension options; however, Rexford was attracted to the potential of future redevelopment into modern logistics. As part of the deal, Rexford also loaned $125 million to the seller to develop an adjacent 150-acre land site into industrial properties. Rexford reported a 6.8% cap rate for both the sale of the property and the loan.

In a similar deal, Dart Warehouse acquired 99 Cents Only Stores' 900,000-SF distribution building and headquarters for $190 million ($210/SF) in August 2023. The facility is aged but has an attractive location in Commerce, adjacent to the intermodal railyard, and near downtown L.A. The sale included a leaseback agreement for an undisclosed short term.

Shifting market conditions has led to an extended period of price discovery. The market price averaged approximately 12% annual growth from 2012 to 2022, but recent trades show softer conditions. The shift in pricing is mainly visible in the delta between asking prices and sale prices. For example, Greater Los Angeles County Vector Control District acquired a 38,000-SF warehouse in Pacoima in December 2023 for $13 million that had an asking price of $14.5 million. The AIDS Healthcare Foundation acquired a 54,000-SF warehouse in Gardena for $20 million in October 2023 that had an asking price of $22.1 million.

The premium for new construction is high due to its scarcity in the market. As an example, BeBella, an owner/user, recently acquired a 92,800-SF warehouse in Santa Fe Springs from Panattoni Development for $53.6 million ($578/SF) in September 2023. The market price for logistics properties in the Santa Fe Springs/La Mirada Submarket at the time of sale was $314/SF.

Cap rates have been rising in tandem to interest rates. However, some properties trade at lower-than-expected cap rates because of their mark-to-market opportunity. For example, Rexford Industrial REIT acquired a 608,000-SF distribution center in Santa Fe Springs for $210 million ($345/SF) in July 2023. Fully leased with GXO Logistics as the primary tenant, the property traded at a 5% cap rate. In early 2022, properties like these were trading at cap rates in the 3.5% to 4% range. While some of the cap rate expansion is captured in the deal, Rexford expects the annual return to yield 6.2% upon releasing at market rates.

Transaction activity may remain stifled in 2024, as interest rates have remained elevated, and there is growing uncertainty around the implementation of the ULA transfer tax. Rent growth has also started to slow, and if that continues, there will be fewer potential mark-to-market opportunities.

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Here are several graphs illustrating the current industrial market in Los Angeles County:

Los Angeles County Commercial Industrial Market Report: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1189861/Los_Angeles_-_CA_-USA-Industrial-Capital_Market-2024-03-10_a.pdf?

Commercial Real Estate Market Reports in Los Angeles:?https://www.manuelangeles.com/?