As the third quarter of 2023 unfolded, the San Fernando Valley’s industrial real estate sector is witnessing a notable shift. A combination of rising vacancy rates, slowing demand, and an increase in sublease space has led to cautious movements among developers and investors alike. This period marks a significant transition in a market that had previously seen aggressive growth, particularly in warehouse space, driven by the e-commerce boom, according to a recent San Fernando Valley Industrial Market Trends Q3 2023 report by NAI Capital.
Market Overview: A High in Vacancy Rates
For the first time in eight years, the vacancy rate in the San Fernando Valley’s industrial market reached 2.4 percent after an 80 basis points increase from the previous year. This uptick is a clear signal of shifting demand dynamics, with new developments and an increased supply of industrial space now outpacing demand. The third quarter saw the completion of 256,821 square feet of construction, contributing to a total of approximately 312,000 square feet over the past five quarters. However, this expansion has been met with diminishing leasing volume, totaling 666,434 square feet during the same period, indicating a slowdown in absorption.
The surge in sublease space further illustrates the changing market conditions. There’s been a 24.2 percent increase in available sublease space quarter-over-quarter and a 149 percent increase year over year, adding 450,000 square feet to the market. This trend underscores a recalibration in space requirements by companies, many of which likely overestimated their needs during the pandemic-induced e-commerce surge.
Developers and Investors Tread Cautiously
Current construction projects have drastically decreased, with only 116,526 square feet underway, marking a 53.2 percent drop compared to the previous year. This cautious approach reflects a broader sentiment of uncertainty in the market, as pointed out by Chad Gahr, SIOR, executive vice president at NAI Capital Commercial. According to Gahr, the era of double-digit rent growth in the San Fernando Valley’s industrial market is over, influenced by increased vacancy, higher borrowing costs, and shifting economic conditions. Despite these challenges, the vacancy rate remains relatively low at 2.4 percent, signaling a market adjustment rather than a downturn.
Emerging Trends and Future Outlook
The slowdown in rent growth, with average asking rents inching up by only 1 cent from the previous quarter to $1.76 NNN, hints at a more tenant-favorable market ahead. This shift could provide businesses looking to lease industrial space with more options and potentially more favorable terms. However, the combination of high prices, rising interest rates, and a softening economy has dampened leasing and sales activity. Leasing volume has seen a 34.2 percent decline from the previous quarter, with sales volume dropping 48.2 percent year to date from Q3 2022. Furthermore, the average sale price per square foot has fallen by 6.1 percent, indicating a market recalibration.
On the leasing front, the following deals were completed during the third quarter of 2023. PRG California rented its lease for 132,936 square feet at 1245 Aviation Pl in San Fernando; NS Wash leased 51,854 square feet at 28309 Avenue Crocker in Valencia; and Cicoil took down another 39,933 square feet at 28606 Livingston Avenue also in Valencia, among other deals.
During this time, Westcore spent over $211 million to buy two Valencia assets: the 417,974-square-foot property at 28355 Witherspoon Pkwy for $285 per square foot and the 321,151-square-foot building at 28305 Livingston Ave for $287 per square foot. In addition, Rexford spent $92,134,500 to purchase the 220,753-square-foot 27712 Ave Mentry property in Santa Clarita at $172 per square foot.
