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The Real Deal Los Angeles

High rents justify high-cost industrial development: report

The spread between costs and rents should drive development, CBRE says
June 11, 2018 05:41PM

A Sealey Power Products warehouse (Credit: Mark Hunter via Flickr)

New construction costs for modern industrial properties are sky high in Los Angeles, but high rents are keeping developers building.

New data from CBRE show that pro forma rents — or reasonably expected rates — are 27 percent higher than what’s needed to break even on development costs, which approaches $170-per-square-foot for a 500,000-square-foot building. Commercial Observer was first to report on the data.

The large spread provides “cushion,” for the market, which means it should remain strong in the near future. The spread also gives developers the confidence to build. CBRE determined the spread between pro forma rents and development costs still had room to grow.

Four markets had higher spreads, led by Chicago at 43 percent. Development costs in the Midwest city are two-and-a-half times lower than they are in Los Angeles, which is by far the most expensive market to develop in, according to the data.

L.A. is also one of the strongest commercial markets in the country, particularly for distribution and logistics space. That’s largely because of the amount of goods coming through Los Angeles International Airport and the ports of Los Angeles and Long Beach, the two largest ports in the country.

That coupled with growth in e-commerce has boosted values sky high and vacancy rates at historic lows. The 1.2 percent vacancy rate in L.A.’s South Bay market was the lowest of any submarket in the country. [Commercial Observer] – Dennis Lynch