Industrial demand in Los Angeles is soaring to new highs, with record low vacancies and increased net absorption. According to a Los Angeles third quarter industrial market report from Newmark, industrial demand is expected to continue but challenges with limited space and the global supply chain could remain an issue for the foreseeable future.
Currently, the vacancy rate in the Los Angeles industrial market is at just 1.2 percent, compared to 2.1 percent during the same time last year. The region follows just behind the Inland Empire’s one percent vacancy rate. Additionally, net absorption in the third quarter reached 3.4 million square feet, causing rental rates to increase to $1.03 percent. In the third quarter of 2020, rental rates were below $1 at $0.89.
“Vacancy, the second lowest in the nation behind the Inland Empire, has remained below three percent for 38 straight quarters,” the report states.
Much of the leasing activity in the third quarter was observed in the North County submarket of Los Angeles, according to the report. The region accounted for 42.7 percent of Greater Los Angeles’ quarterly net absorption activity, with Furniture of America, Best Warehousing & Transportation, CC Wellness and DrinkPAK all occupying 200,000 square feet of space or greater in North County. The region is also set to lead next quarter in activity, when Amazon will complete tenant improvement work on its new 1.5 million square-foot facility in Oxnard.
Other major leases signed during the third quarter include Matheson Trucking’s 415,150 square-foot lease in Long Beach and Omni Logistics’ 251,606 square-foot lease in Torrance.
The Los Angeles industrial market also saw several major acquisitions throughout the course of the third quarter. The largest transaction was by Scout Capital Partners, which paid $117 million for a 350,256 square-foot industrial property in the City of Industry. Investcorp and CenterPoint Properties also each paid $67 million for respective properties in Newbury Park and Pico Rivera.
However, as demand remains high, space constraints have played a toll on the market. Since 2020, approximately 8.2 million square feet of new industrial space has been added, and 87.2 percent is already occupied. Currently, there is seven million square feet of industrial space in the development process, and 1.5 million square feet of space was delivered during the third quarter. New construction is expected to slow as more space is occupied, and many developers are expected to begin adaptive reuse projects instead.
Other challenges facing Los Angeles’ industrial market come in the form of supply chain issues. According to the report, supply chain costs could raise rents for industrial tenants even further as occupiers expand footprints to adopt a “just-in-case” inventory model. This helps companies get product to consumers faster, cutting down on shipping times and cost. However, with this model decreasing the rate of available space even further, landlords are likely to push rents higher in the coming months.
Despite challenges, demand for industrial supply is only anticipated to increase. Supply chain issues will remain for a while as manufacturers and distributors learn to work under the new constraints. However, with e-commerce continuing to grow and space becoming increasingly difficult to find, Newmark suggests industrial product will be a sought-after asset by tenants and investors for years to come.
“Consumer spending remains healthy amid government stimulus, labor markets are improving, global supply chain issues will not abate anytime soon and e-commerce sales growth is pronounced. All favor industrial leasing fundamentals, especially in a region with a consumer population of 10.2 million and the nation’s busiest port system port. Rent growth will persist,” the report states.
Newmark did not respond in time to comment on this story.
