The San Fernando Valley’s industrial real estate sector, a historically robust and dynamic market, has encountered significant shifts in demand and vacancy rates throughout the third quarter of 2023. These fluctuations have surfaced as a result of various factors, including increased sublease space, moderated demand and cautious investor sentiment, according to a recent NAI Capital San Fernando Valley Industrial Market Trends Q3 2023 report. These trends paint a nuanced picture of a market recalibrating after years of fervent activity.
The third quarter witnessed a surge in the industrial vacancy rate, marking an increase of 80 basis points to reach 2.4 percent, a level not seen in eight years. The escalation in vacancy rates can be attributed to multiple factors, notably an influx of completed construction projects totaling 256,821 square feet. However, while developments have added space to the market, the pace of leasing activity — accumulating to 666,430 square feet over the past five quarters — has not kept up. This imbalance has contributed to a scenario where companies, having overestimated their space needs, are placing sublease spaces on the market.
The landscape has shifted from the ardent pace observed due to the surge in e-commerce demands, which previously fueled a robust need for warehouse space. This transformation has led to a substantial uptick in available sublease space — up by 24.2 percent from the previous quarter and a staggering 149 percent from the same time last year. Notably, developers are now proceeding cautiously, evidenced by a substantial 53.2 percent decrease in industrial space under construction compared to the previous year, adds the report.
Additionally, the once robust rent growth has moderated, with the average asking rent climbing by just one cent from the prior quarter to $1.76 per square foot. Despite this marginal increase, there has been an 11.4 percent rise in rent from the third quarter of 2022. This slowdown presents a dual outlook — concern from developers amid weaker rent growth and a positive perspective for potential tenants seeking leases in the future.
The report added that while increased vacant industrial space has offered tenants more choices, the market has seen weakened industrial building leases and sales due to high prices and rising interest rates. Leasing volume contracted by 34.2 percent from the prior quarter and 13.8 percent year-to-date compared to the previous year. Similarly, sales volume dropped by 48.2 percent year-to-date from the third quarter of 2022, with the average sale price per square foot reflecting a 6.1 percent decline quarter-over-quarter.
The industrial market in the San Fernando Valley is in a state of recalibration, moving towards a more balanced state, offering tenants increased choices and marginally influencing rental rates. The combination of rising interest rates, a decelerating economy, and softened demand are expected to put pressure on pricing as the year draws to a close.
Developers and investors are adjusting their strategies in response to these changing dynamics. The moderation in rent growth, coupled with increased available space, presents challenges but also opportunities for prospective tenants. As the market continues to evolve, monitoring these trends will be pivotal for stakeholders navigating the San Fernando Valley’s industrial real estate landscape, concludes the report.