In 2023, the industrial real estate sector in Los Angeles experienced a paradigm shift, challenging the longstanding trends of ever-decreasing available space and perpetually rising asking rents. The year marked a significant transition with increases in available space, reductions in asking rents, a potential peak in construction activity, alongside continued growth in e-commerce and a notable rebound in port activity in the final quarter, according to A Closer Look At Los Angeles Industrial – Q4 2023 report by Cushman & Wakefield.
Surging Available Space
After hitting a historic low in Q4 2021 with just 10.6 million square feet of available space, the Los Angeles industrial market witnessed a dramatic turnaround. Throughout 2023, an additional 20.4 million square feet of space was introduced to the market, representing a significant 109 percent increase compared to 2022. This influx included 5.8 million square feet of sublease space, up 389 percent year-over-year (YOY), indicating a volatile market adjusting to changing demand dynamics.
Declining Asking Rents
The once upward trajectory of overall asking rents in Los Angeles, which had seen consistent growth for 19 consecutive quarters, took a downward turn in the latter half of 2023. From an average increase of 4.2 percent over those quarters, rents fell from $1.70 per square foot per month to $1.58 per square foot by Q4 2023, a 7.1 percent quarter-over-quarter drop. This decline reflects a softening market, adjusting to the increased availability and evolving needs of tenants.
Construction Activity: A Potential Peak
Construction activity in the Los Angeles industrial market reached a 10-year high in Q4 2023, with 9.8 million square feet underway. However, this boom may have reached its zenith as the total inventory under construction saw a 13 percent decrease from the previous quarter to 8 million square feet. The cooling off suggests a market response to the growing vacancy and availability, hinting at a more cautious approach moving forward.
E-Commerce: The Steady Climb
E-commerce continued its upward trajectory, further cementing its role in the industrial market’s evolution. With a quarterly growth rate averaging 4.3 percent over the past five years, e-commerce sales reached $284.1 billion in Q3 2023. This growth contrasts with the more modest 1.4 percent increase in non-e-commerce sales, showcasing the shifting consumer behaviors and the increasing reliance on online shopping, which now accounts for 15.6 percent of total retail sales.
Port Activity: A Late-Year Rebound
The Port of Los Angeles saw a resurgence in activity in Q4 2023, with total TEU volume up 15 percent YOY after a challenging start to the year. This rebound was facilitated by the resolution of contract negotiations and external factors such as the drought affecting the Panama Canal. The increased activity in the final quarter is a positive indicator for the coming year, suggesting resilience in the face of earlier downturns.
Looking Ahead
The industrial real estate market in Los Angeles is navigating through a period of adjustment, marked by the increase in available space, the easing of rent pressures, a reassessment of construction projects, and the ongoing growth in e-commerce. These shifts underscore the market’s responsiveness to broader economic trends, technological advancements, and global logistical challenges. As stakeholders adapt to these changes, the resilience and adaptability of the Los Angeles industrial market will be pivotal in shaping its trajectory in the years to come.
