Hot South Bay industrial market driving demand and higher prices for older properties

A strong economy has investors scrambling to scoop up warehouses, whatever the vintage or condition

May.May 17, 2018 03:30 PM
The ports of Los Angeles and Long Beach from Palos Verdes (Credit: Wikimedia Commons)

Competition for industrial space in the South Bay is fierce and it’s driving demand from buyers and tenants who are eyeing warehouse properties they may have previously overlooked. That in turn is leading to higher prices in what had until recently been a relatively sleepy market.

Rental rates for older industrial buildings are creeping up near those sought for newer construction, according to a report released by brokerage Lee & Associates this week. That’s because tenants are eager to secure spaces amid expectations that the economy will continue to expand over the next few years.

Typically, industrial properties built in the last 15 years tend to be larger than 500,000 square feet and have ceilings higher than 30 feet, along with large areas for maneuvering trucks to accommodate modern needs, according to the Journal of Commerce, a trade publication. They also command top rents. Older properties that may need some renovation, are smaller, with lower ceilings and smaller turning radiuses for trucks usually were acquired at a discount.

Now, the older properties are getting multiple offers, according to Lee & Associates, which is driving up prices. Asking prices shot up over the last year or so from average of around $130 per square foot to upwards of $215 per square foot.

The South Bay has long been an industrial and distribution hub for Los Angeles thanks to its proximity to the ports of Los Angeles and Long Beach and to Los Angeles International Airport. The area covers a number of cities south of Interstate 110, including Torrance, El Segundo, and Hawthorne.

Activity at the ports continues to rise on the back of surging e-commerce, which is in turn has been driving demand for distribution and logistics centers that will form the backbone of internet-based businesses.

Across all industrial property classes, the South Bay market’s 1.2 percent vacancy rate was the lowest of any submarket in the country. Sales volume was down 44.5 percent compared to the fourth quarter of 2017 to eight transactions, but that can be attributed to the dearth of properties on the market, according to Lee & Associates.

All eight of those transactions were for properties more than 49 years old and they sold at a record high average of $169 per square foot for that class.

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