Blog #midcounties

In Q3 2024, the South Bay submarket saw a continued increase in vacant space, with the vacancy rate rising to 4.4%, up 20 basis points from Q2 and 50 basis points year-over-year. Tenants are becoming more selective, taking advantage of longer decision-making periods. Despite a 7.8% year-over-year decline in average asking rents, rents remained somewhat resilient due to concessions from landlords.

Leasing activity included 1.37 million square feet of new deals, though it was below the 10-year average. Net absorption was positive for the first time in a year, at +669,007 square feet. Construction continues with 1.5 million square feet in progress, which could impact vacancy rates if demand doesn't catch up.

Sales activity increased from Q2 but remained significantly lower than in 2023. Sales volume reached $71.9 million, and average prices per square foot dropped 22.5% year-over-year to $258.92.

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!

A prevalent and unifying trend has emerged in the industrial markets of Greater Los Angeles & Long Beach, Orange County, and the Inland Empire during the third quarter of 2023: an uptick in vacancy rates. This development has undoubtedly captured the attention of real estate observers, raising questions about the resilience of these markets amidst evolving economic conditions.

While it's true that asking lease rates and sale prices have moderated from their previous peaks, they continue to hover at historically elevated levels. This is particularly noteworthy in the realm of leasing, where the prevailing rates are higher than what has been observed in the past. The apparent contrast between increased vacancies and persistent high asking rates creates an intriguing narrative within these markets.

The question that naturally arises is whether this shift in vacancy rates is a direct consequence of the recent Federal Reserve interest rate hikes or if it's a temporary slowdown in the market's momentum. The answer to this query remains somewhat elusive, and much like the economic outlook itself, it is subject to ongoing observation and analysis.

One plausible hypothesis is that the impact of the Federal Reserve's interest rate hikes has yet to fully materialize. These hikes may have prompted businesses and investors to reevaluate their strategies, potentially leading to a pause in leasing and purchasing activities. The full ramifications of such monetary policy decisions often take time to ripple through the real estate sector.

On the other hand, it is equally plausible that the observed increase in vacancy rates is a transient phenomenon. Industrial markets are influenced by a myriad of factors, including supply and demand dynamics, economic cycles, and regional conditions. Short-term fluctuations are not uncommon, and they may not necessarily indicate a fundamental shift in the health of these markets.

As we move forward, close monitoring and analysis of these markets will be essential to provide a more definitive answer. Factors such as employment trends, trade activity, and consumer behavior will play a pivotal role in shaping the trajectory of these industrial markets. Whether the current situation is a harbinger of sustained change or a brief pause in the continued growth of these markets will be revealed in the coming quarters, offering valuable insights into the ever-evolving real estate landscape.