Industrial Building Viewpoint for 2024

Industrial Building Viewpoint for 2024

Industrial Building Viewpoint for 2024

There are a lot of industrial buildings available in Los Angeles. It’s a cyclical business and this may be the low point with interest rates projected to decline over 2024. If that’s the case the downturn wasn’t severe. For now, new development will moderate until absorption and lending pick up. Tenants may not see this opportunity for a long time to come. With falling rents, landlords need to close deals fast. If negotiations stall, that tenant will find a cheaper building.

Our analytics show a very healthy supply of buildings between 100,000 square feet and 200,000 square feet. Larger buildings are slightly harder to find because large parcels are rarer in an already developed city. Small spaces are relatively scarce, especially those with power, since there has been very little new construction in that size category for several years. Since rents are greatly influenced by property taxes, we include them when we plot rents. By far the better bargains are with long-term owners, who because of Proposition 13, have significantly lower assessments. Conversely, if you need a new, modern warehouse for high capacity uses, you still need to pay up.

Los Angeles Industrial Real Estate Price per Square Foot over 100k
Los Angeles Industrial Real Estate Price per Square Foot over 100k

China Gateway

While Los Angeles has a diverse industrial base, much of the development and leasing activity over the past two decades came directly from Chinese goods entering San Pedro Bay. The warehouse business in Southern California and as far away as Central California, Las Vegas and Phoenix have all grown because of Chinese Imports. Declining imports through Los Angeles unquestionably impacts leasing and rental rates.

In only a short period, the growth story of industrial real estate for the past 20 years started when China was admitted to the World Trade Organization. The driving force of industrial real estate was to accommodate Chinese imports with a vast distribution network of North American warehouses and container yards. The ecommerce boom, surging during the Covid period, was another large reason corporates were taking on large chunks of warehouse space. Corporations today are adjusting their needs due to new policies in targeted industries for computer chips, electric vehicles, national defense and import tariffs… And seeking new suppliers away from Chinese chokepoints.

The import amplification during the Covid period caused an outsized snarl in the supply chain. You may recall as many as 105 container ships were waiting along the Sothern California Coast for a berth. The unprecedented backlog is well over and so are the market distortions that came with the import surge. In addition, because of port delays, resiliency, and labor slowdowns, many importers made the permanent decision to shift warehouses away from Southern California to other US ports in the South and East.

Import Volumes from China into LA 1980-2023 - Line Chart
Import Volumes from China into LA 1980-2023

Industrial Policy

Outside of Los Angeles and throughout many parts of the U.S., recent tenant demand has been spurred on by a massive, $2.2 Trillion federal industrial policy included in the CHIPS, IRA, Bipartisan Infrastructure Deal and a national defense industrial strategy. This combination of direct grants, subsidies, domestic content rules and friend-shoring has increased industrial building tenancy and development. Unlike organic development that occurred because of open trade, current US industrial policy is heavily supported by political decisions and lobbying. Local leaders take credit for federal subsidies and state incentives that bring employment. There are many published maps that show investment for computer chip plants, EV vehicle production, batteries, defense plants, and other new factories.

Investing in America - Map
Investing in America

As industrial supply chains adapt, so does the real estate that serves them. Over the past couple of decades, an open market, characterized by Chinese imports, determined the location for industrial building development. This generally meant locations near major container ports received the most interest. In contrast, industrial policy changes trade dynamics by turning to suppliers that will support US national goals. For instance, more manufactured goods are coming through Mexico and creating more traffic for industrial products along the Kansas City Southern Railway (KCS). Monterrey to Houston, Dallas, and Kansas City are new, important links along with many of twin plants across the border towns. Another example is European manufacturers; when they seek to expand in the U.S, Europeans prefer locations in the southeast because of shorter travel times and “right to work” rules.

Railway Map
Kansas City Southern Railway (KCS).

Interest Rates

For Los Angeles real estate and beyond, the rapid rise of interest rates shook 2023 and put both tenants and the investment/development community in a squeeze. While not historically high, the 250-basis point increase was rapid and caused turbulence for those counting on low rates forever (or at least until they sold their building). Even with a forecast of interest rate reductions in 2024, a higher hurdle rate and an increase in the cost of carrying vacant space will provide more balance between landlord and tenant.

Interest Rates - Line chart 1970 to 2023
Interest Rates – 1970 – 2023

Over the past 15 years, particularly starting in 2008 during the Great Financial Crisis, industrial real estate became financialized as investors searched for advantageous relative returns. It put the traditional owner-user in the position of renting because all the best deals got snapped up by investor/developers. This condition started to moderate in 2023 as normality returned with more opportunities for local business owners to buy their own real estate. Don’t wait too long. There is a new wave of money entering the market. Private wealth managers are seeking alternative investments like industrial real estate. These new buyers will become more apparent as bond yields drop.

Outlook

In our areas of specialty, we see the following:
Our traditional “farm area” for over forty years is in the South Bay, particularly Gardena. This also includes Carson, Compton, Torrance, Dominguez and into the Beach Cities and portions of Long Beach. The zip codes 90061 and 90248 are also included and go by several different names, West Rancho Dominguez, East Gardena, Unincorporated County, and my favorite, “The Strip”.

South Bay industrial property is a core holding of every major industrial REIT, Pension Fund and Insurance Company. It’s notable for legendary aviation, electronics, and defense manufacturing companies; vast warehouses serving San Pedro Bay; proximity to L.A.’s transport infrastructure including the twin ports, LAX, Downtown, downtown markets and a dense freeway network. It’s central to labor, executives, and a skilled and educated workforce. The combination of appreciation and rent growth is among the best in the U.S.

The Strip - Map
The County Strip

One area that deserves special attention is “The Strip”. Over the past few years because of lax policies and enforcement, local Los Angeles government has allowed RV Campers to park on the streets bringing with it crime, squalor, drug dealing, and prostitution. The area smells of human waste and trash. This condition has caused values to plumet and tenants to flee. Finally, at the end of last year, the County started to offer more permanent housing and campers are being removed from several major corridors. While some streets have returned to sanity, if you take a drive on Redondo Beach Boulevard, Avalon Boulevard, 131st Street or Spring Streets, you will see the awful human condition. Local government leaders say they are making progress and in a hopeful start to the New Year, as the RVs are removed, values and tenants will return. Why? Location, of course.


Los Angeles Map - Buildings Plotted for Lease/Sale

Filling up empty buildings is a goal for 2024. In contrast to recent previous years, vacant industrial building inventory is growing (map above is 50,000 SF and greater). Many new property owners are facing headwinds from the finance markets, and they are motivated to obtain tenants. As prices settle, more tenants will see the opportunity is now! We use experience, analytics, and long-time relationships so clients are assured of the deals they make. As an independent broker, our background in corporate real estate provides a discernable edge in analysis and acumen.

LA to Inland Empire Map
Los Angeles to Inland Empire

While Los Angeles is the largest industrial building market in the U.S., and when combined with the Inland Empire, Southern California is an industrial behemoth. For many companies, “agglomeration” is the primary reason to be in Greater Los Angeles. However, many businesses continue to seek new horizons to avoid California regulation, politics, and taxation. For those businesses considering leaving California, our SIOR colleagues in the Inland Empire, across the U.S., Canada, Mexico, and Europe have helped many of my customers re-locate and add secondary facilities. In cases when we have the data, we add our analytics and custom program to find “off-market” deals.

Employment in Warehousing, Wholesale and Manufacturing across US MSAs
Employment in Warehousing, Wholesale and Manufacturing across US MSAs

One area deserving caution is the newer asset class called Industrial Outside Storage (IOS). It’s been a mainstay of industrial property investment particularly near Gateway markets where imports arrive. Many investors have climbed onboard but the IOS market is heavily dependent on truck/container storage and goods arriving from China. Rents are noticeably declining, and vacancies are growing.

Best wishes for an exciting 2024!

How Is Industrial Real Estate Today?

How Is Industrial Real Estate Today?

Map showing electrical symbol for buildings with increasing size based on building
Power Map of Buildings In LA County

Industrial real estate is a diverse business that includes Investment funds, developers, private/family owners, corporations, occupiers, and a mix of product types and industries. Industrial buildings are in every community and are the source of employment, production, distribution, and wealth for many. The nation’s economic health rides on the success of industrial real estate.

There are several factors that are driving deals today. Broadly, these include Interest Rate Policy, US Industrial Strategy, and Local Municipal Governance. Everyone is affected differently. For example, higher interest rates are never good for real estate, though they affect sales more than leases; sale transactions are interest rate sensitive while leasing is supply and demand based. As an experienced broker, we use detailed knowledge, market analytics, and long-standing relationships to help you in making the best decision.
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New Gardena Industrial Commentary

New Gardena Industrial Commentary


The geography of Gardena needs explanation. There is the City of Gardena proper and three times larger than the city boundary, is the Gardena Postal Zone. The larger Gardena area includes parts of Unincorporated Los Angeles County (West Rancho Dominguez), City of Los Angeles Strip, and the northwestern part of Carson. The zip code 90061 is also included in most market studies of Gardena because it squares off the uniform industrial portion of West Rancho on the north side. When someone asks me how the real estate business is in Gardena, it depends where you are located. Each municipality has its own zoning regulations and homeless policies which have a direct relationship to the individual parcel value.
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Three Innovations for 2023

Three Innovations for 2023

ChatGPT:

I could not start the year without acknowledging the tools that are currently available at Open AI. I’ve recently created a new FAQ page with the use of ChatGPT and Dall-E 2. It must have been under the wire before Google Search created new defenses against text bots. I received one solid lead from a company looking for 30,000 square feet because of the AI-generated explanation of my services.
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Stricter Underwriting is Here – Industrial Policy is a New Catalyst

Stricter Underwriting is Here – Industrial Policy is a New Catalyst

For the past several years, and particularly during the COVID-19 Period, conventional underwriting took a back seat to momentum. No one’s pro-forma predicted the incredible rent growth over this period. Low interest rates and shortage of product drove prices higher. Industrial rents doubled in two years. Underwriting was limited to the simple and liberal measurement of Net Rent/Purchase Price = Rate of Return. Any return higher than treasury rates signaled a buy. It was the period of “Search for Yield”.
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Recent Observations: Real Estate Trends

Recent Observations: Real Estate Trends

postcard with SQFT text

Observations of Industrial Real Estate Trends

Real Estate Trends – The Good

Intense industrial real estate trends and conditions are diminishing. There are fewer container ships waiting to unload. The cost to ship a container from Shanghai to Los Angeles is 30% lower from its high. Building rents are still increasing but the doubling during the Covid-19 period was an aberration. While signs of a hyper-market are departing, a strong industrial market remains. There is a deficit of available space, strong corporate demand to improve supply chains and manufacturing resiliency, e-commerce, and high investment flow. Rent surges will continue with holiday stocking schedules starting in the Summer and again later in the year when China re-opens from its Covid-19 lockdown.
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2022 Continues – Severe Space Shortages

2022 Continues – Severe Space Shortages

potential 240,000 square foot lease deal near LAX

Acute space shortages are national news. Not only here in Los Angeles, where it’s about the worst, but all over the United States. Many tenants are being caught short and others are taking space far in advance, at greater amounts, and at much higher cost. Price bidding leads landlords to weigh credit, use, and history. Credit is the most important enhancement because it notably increases the value of buildings. Larger landlords also favor tenants that will lease multiple buildings across their national holdings.
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2021 Remains an Unbalanced Industrial Market

2021 Remains an Unbalanced Industrial Market

The industrial property business has grown from a real estate niche serving mostly large corporations and owner/users to a favored investment of large institutions. The rise coincided with the great manufacturing upheaval of shuttered plants as companies shifted production offshore. Goods return in containerized shipments and begat the new industry of logistics. The result was increased liquidity of both goods and capital. A situation that is ideal for warehouse development and investment. Today’s industrial marketplace is made up of global and national 3pls, shipping companies, e-commerce, and on the capital side, Industrial REITS, large investment funds, and a handful of developers. The Covid Supply Chain phenomena and an increase in tariffs has compounded an already unbalanced space market to acute levels
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Commentary on Industrial Markets

Commentary on Industrial Markets

Week of June 25 – Need For Space

The industrial market during the Covid-19 period, now edging back to normality, is a lesson on disruption. The most visible example are container ships backed into the sea and unable to unload goods because there is not enough dock space available at the ports. It is the same at warehouses and container yards: too many products and not enough space.
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