Blog #bellflower

• Leasing Activity: 2.3 million square feet (MSF) of industrial space leased this quarter, up by 1.03 MSF from the previous quarter.
• Vacant-Availability Rate: Dropped by 0.4% from last quarter to 4.2%, but still 2.8% higher than last year.
• Market Trends: Increase in vacant-available space due to tenants returning unused space since 2023.
• Asking Lease Rates: Declined to $1.71 (direct) and $1.68 (overall) per square foot (PSF), though still 40%+ higher over the last five years. Class A spaces aim for $2.00+ PSF.
• Tenant Behavior: Tenants are more selective and pushing for rental concessions, with landlords becoming more negotiable.
• Net Absorption: Positive for sublet space (525,417 square feet) but overall net absorption negative at -539,467 square feet.
• Sales Volume: $51 million across 9 transactions in the South Bay, with average building prices at $288.61 PSF and land values at $143.79 PSF.
• Capitalization Rates: Increasing due to higher capital costs, forcing sellers to adjust prices.
• Interest Rates: Around 6.5% for fixed, 25-year owner-occupier loans.
• Insurance Challenges: Rising premiums and providers exiting the California market.
• Property Values: Some industrial areas affected by homelessness and vagrancy, impacting property and rental values.

Here are a few of the important points from the quarterly update on the greater Los Angeles industrial real estate market: 

1. Market Conditions:
   • Vacancies and availability increased across all submarkets.
   • Lease rates experienced a decrease.
   • Sales and leasing activity hit historic lows.
   • Construction starts diminished.
2. Employment and Wage Trends:
   • Unemployment rate fell to 3.8%, with a slight increase in labor force participation rate.
   • Average hourly earnings rose by 4.1% year-over-year, surpassing inflation.
3. Inflation Concerns:
   • Inflation measures remain elevated, with growing worries that the disinflation process has stalled.
   • CPI report indicates inflation surpassed forecasts, with both month-over-month and year-over-year increases.
4. Economic Growth:
   • Economy grew by 2.5% on an annual basis at the end of 2023.
   • Forecasted GDP growth for Q1 2024 is around 2.4%.
5. Investor Sentiment and Market Behavior:
   • Cautious investor sentiment due to uncertainty over potential federal interest rate cuts and geopolitical challenges.
   • Opportunities for owner-occupiers to acquire buildings with less competition from institutional investors.
   • Smaller buildings sought after via SBA loans and conventional financing, but with stringent oversight from lenders.
6. Tenant Trends and Industrial Real Estate:
   • Lease renewals becoming more prevalent among tenants.
   • Tenants increasingly subletting unused space.
   • Despite market corrections, industrial real estate remains sought after, driven by barriers-to-entry and demand for newer, functional space in infill Southern California markets.

The report ends with a note that the Port of Long Beach and Port of Los Angeles are seeing higher volumes.  With West Coast labor concerns resolved and issues at the Panama Canal (drought), Red Sea (safety), East Coast labor negotiations and now Baltimore (FSK Bridge Collapse) expect this trend to continue.

1. Vacancy Rate Increase in South Bay Industrial Market: 

• The South Bay Industrial market has experienced a year-over-year increase of 250 basis points in vacancy rates, reaching 3.9%.
• This uptick suggests a change in the demand and supply dynamics within the industrial sector of the South Bay.

 2. Sublease Transactions in Industrial Leasing: 

• Out of the 87 industrial lease transactions in the 4th quarter, 17.2% were sublease transactions.
• The prevalence of subleases in the industrial sector underscores a strategic approach by tenants, potentially driven by the need to optimize existing space or adjust to evolving operational requirements.

 3. Tenant Responses to Scarcity in Industrial Spaces: 

• Faced with continued scarcity, many industrial tenants in the South Bay have chosen to renew existing leases or implement efficiency measures within their current space.
• This strategic response has contributed to a cooling effect on the market, leading to a 3.2% year-over-year decrease in industrial lease rates.

 4. Larger Decline in Industrial Lease Rates for Direct Spaces: 

• The industrial lease rates for direct spaces have seen a larger quarter-over-quarter decline of 11.25%.
• This pronounced decrease indicates heightened competition and negotiation dynamics in the industrial leasing market, likely influenced by increased vacancy rates and tenant strategies.

 5. Landlord Concessions in Industrial Leasing: 

• The decline in industrial lease rates and the competitive landscape have prompted landlords to make some concessions to facilitate deals.
• Concessions may include adjustments in terms, incentives, or other favorable arrangements to attract and retain industrial tenants.

 6. Industrial Sales Transactions: 

• Industrial sales transactions have experienced a decline in the average number, dropping from a quarterly average of 20 to 13.
• Additionally, both the average and median industrial asking sales prices have decreased quarter over quarter, reflecting a softening in the industrial sales market.

 7. South Bay Industrial Market Positioning: 

• Despite the observed trends, the South Bay Industrial market remains 4.4% below the 20-year national average industrial vacancy rate.
• The areas surrounding the port continue to be more optimal for most Industrial operations, indicating a sustained high demand in the foreseeable future.

 8. Additional Reports for Midcounties, Central (Los Angeles), and Inland Empire Industrial Markets: 

• The report includes insights into the other industrial markets of Midcounties, Central (Los Angeles), and Inland Empire, providing a comprehensive view of the broader industrial landscape in the region.

In summary, the South Bay Industrial market is navigating through changes with increased vacancy rates, strategic tenant responses, and shifts in leasing and sales dynamics. Despite these trends, the market remains below the national average industrial vacancy rate, with certain areas, particularly around the port, expected to continue experiencing high demand. The inclusion of reports for other industrial markets enhances the overall understanding of the industrial real estate landscape in the region. If you have specific questions or would like to explore particular aspects further, feel free to let me know!

Every key metric typically used to measure the health of the economy is performing well right now. GDP grew by 2.0% in Q1, and it is estimated to grow by 2.3% in Q2 by the Atlanta Fed . In terms of employment, over the last year the U.S. added 3.8 million jobs and now has an unemployment rate of 3.6%. With regard to inflation, both headline and core inflation are
trending downward. The Consumer Price Index (CPI) rose by 3% year-over-year in June and 0.2% for the month, below consensus estimates of 3.1% and 0.3%. This was the lowest rate of inflation since March 2021. And core inflation, which excludes food and energy prices, rose by 4.8% year-over-year and 0.2% for the month. The annual core inflation level was
the lowest since October 2021, and its monthly gain was the smallest gain since August 2021.

Most economists, forecasters, and business leaders are anticipating that the Fed will continue to raise rates throughout the year until it reaches its target inflation rate. For this reason, most forecasters still believe a mild and shallow recession is likely within the next twelve months. However, a significant minority are anticipating that the US economy will avoid a recession altogether. For example, in its latest forecast, the National Association of Realtors has the economy growing slowly every quarter throughout 2023 and projects the economy to grow by 1.1% for the whole year. 

Regardless of one’s stance on this issue, it is indisputable that the industrial market is in a favorable position to weather most headwinds the economy might face. Total retail sales grew by 1.6% in May 2023 compared to the same period a year ago , and as a percentage of total sales, e-commerce retail sales (one of the key drivers of the industrial sector) now stand at 15.1% – 3.9 percentage points higher than where it stood at its peak prior to the pandemic in Q4 of 2019. With this said, available space continues to increase and there has been a growing sentiment regarding a shift in negotiating power from Landlords to Tenants

For the first time in a long time a change in the market materialized in the 1^st quarter of 2023 in the Los Angeles – Long Beach Industrial Real Estate Market.  It appears that lease rates may have hit their ceiling for now.  The level of leasing activity in Q1 of 2023 dipped to levels not seen since 2006.  Despite the drop in activity demand for Industrial space remains at top levels and a struggle between historically high rates and the need for space is likely to play out over the next 18 or so months.

The Los Angeles industrial real estate market is one of the most active and sought after in the United States. It is a diverse market, ranging from smaller facilities to large, modern distribution centers. The demand for industrial space in Los Angeles has remained strong due to the city's strategic location, growing population, and thriving economy. The Los Angeles industrial real estate market has also benefited from the rise of e-commerce, as online shopping has led to an increased demand for warehouse and distribution facilities. While the COVID-19 pandemic has had an impact on many industries, the industrial sector has remained resilient, with strong leasing activity and a stable vacancy rate. Overall, the Los Angeles industrial real estate market presents many opportunities for investors, developers, and tenants alike. 

The Los Angeles industrial real estate market in the fourth quarter of 2022 was strong, with robust demand and limited supply leading to higher rental rates and lower vacancies. The e-commerce sector continued to drive demand for warehouse and distribution space. Overall, the market was characterized by a favorable balance between supply and demand, with positive outlook for the future.

Q3 2022 saw the economy start to slow but Industrial Real Estate remain tight.

Low vacancy and high demand continued to drive higher sales prices and lease rates.

The Los Angeles / Long Beach Industrial Real Estate market experienced more of the same, high demand and low supply.  Sale prices and lease rates for warehouses and industrial properties continue to set all time highs.  Click below for full report.

The market continues to set record sale prices and lease rates as vacancies remain at historic lows.  Click below for full report.

Already low vacancy rates shrunk to 1.1% as lease rates and sales prices continue their ascent. An unprecedented 20% growth in rent rates was experienced in Q2 of 2021 and average sale prices increase by 37%!  Click the below link for the full report.