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Los Angeles County Industrial Market Shifts Amid Supply Surge in Vacant Sublease Space

10/10/23

This report provided by real estate services firm NAI Capital Commercial


MARKET OVERVIEW

The industrial market in Los Angeles County underwent a complete turnaround as it shifted away from the relentless demand for warehouse space. Completed construction surged by an impressive 338% quarter over quarter, resulting in a 190-basis point increase in the vacancy rate, which now stands at 3.95—the highest it has been in a decade. New developments and increased supply of industrial space are now trailing diminished demand. In Q3 alone, completed construction added approximately 3.1 msf. Over the past five quarters, LA County added roughly 4.9 msf of completed construction to the market, while absorption resulted in a negative 15 msf during the same timeframe.

While land constraints limited new development, developers aggressively pursued keeping pace with economic growth and the seemingly unending demand for warehouse space across the region, driven by e-commerce, which has mostly been satisfied now. According to the latest figures from the Ports of Los Angeles and Long Beach, combined TEU cargo volumes, a significant driver of warehouse space demand in Southern California, declined by 23.1% year to date as of August. Currently, 7.7 msf of industrial space is under construction, representing a 6.3% drop from the prior quarter but a significant 45.2% increase compared to last year.

Strong rent growth has been the primary driver in the push for new construction. This quarter, the average asking rent weakened by 3.3% from the previous quarter to $1.74 NNN, while showing a 9.45 rise from the second quarter of 2022. This raises concerns for developers and provides a more positive outlook for tenants seeking leases in the future.

TRENDS TO WATCH

With the COVID-19 shutdown-induced supply chain disruptions now subsided and leasing velocity to support distribution networks moderating, developers are likely to pause the construction of large warehouse distribution facilities. Companies that expanded their warehouse space throughout the pandemic to accommodate the e-commerce surge have actively reduced excess space. In Q3, the industrial market reached an all-time high in vacant sublease space, indicating that companies that overestimated their space requirements have left warehouses empty and are seeking subtenants. This has resulted in a significant increase in the amount of vacant sublease space on the market, up by 19.6% from the previous quarter and by 397% from the same time last year, totaling approximately 5.7 msf. Moreover, 12.7 msf of vacant space were directly added to the market since Q3 2022, accompanied by 3.1 msf of completed construction year to date in 2023.

Despite lower economic growth, companies eager to dispose of costly unwanted space while some pick up much-needed lower-priced space will demonstrate the industrial market's resiliency. The increase in available industrial space offers tenants more options, although high prices and rising interest rates have weakened industrial building leases and sales. Leasing volume has experienced a decline of 5.5% compared to a year ago, amounting to 26.3 msf year to date. Sales volume dropped 32.8% in the same timeframe. The average sale price per square foot has registered at $278, reflecting an 18.5% drop year over year. The combination of rising interest rates, a slowing economy, and weakening demand will have a dampening effect on pricing heading into the end of the year.


This report was provided by J.C. Casillas, Managing Director, Research, NAI Capital Commercial









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