The Real Deal Los Angeles

Red-hot industrial market plateaued toward end of 2018: report

Rents jumped 7.5% over the year, while 5.5M sf was added to market
By Gregory Cornfield | January 29, 2019 05:00PM

From left: 5959 Randolph Street, a rendering of the Torrance project, and 5300 Sheila Street

Los Angeles’ industrial market cooled down in the latter half of 2018 due to limited available space and nervousness about the cycle coming to an end, according to a new report.

The plateauing concluded a year in which investors preyed on the L.A. market, making it one of the strongest and most active in the country, commercial real estate firm CBRE said in a report.

Proximity to numerous airports and ports helped make Los Angeles a top target for retailers with online platforms. The increased demand pushed leasing and purchasing prices to record highs, and 2018 ended with the 17th consecutive quarter of sub-2 percent vacancy rates.

Due to increased competition, land prices jumped 25 percent year over year. The average asking lease rate jumped 7.5 percent year over year, and available space dwindled, causing some companies to relocate to adjacent markets.

Despite an intense scramble for available sites, developers delivered more than 5.5 million square feet of newly completed industrial space to the market in 2018, mostly in the San Gabriel Valley and South Bay submarkets.

Vacancy rates closed at 1.4 percent, slightly higher than at the start of 2018. CBRE said untimely move-outs played a significant role, softening occupancy gains in the second half of the year.

The inability of landlords and users to agree to terms resulted in spaces staying on the market slightly longer than expected. Most tenants wanted shorter leases, while landlords wanted longer lease terms to achieve higher rents.

Even with lower activity levels than in years past, buildings were heavily utilized with minimal downtime between tenants compared to other sectors.

CBRE’s analysts predicted that available space will flatten somewhat over the next two years, and that rental rates will increase an additional 4.5 percent in 2019.

The firm projects that more than 3.7 million square feet of new construction will be completed, and that occupancy gains will be steady this year, driven by port activity and online shopping.

In another recent survey, more than 90 percent of investors said they were optimistic that industrial activity would remain steady or increase over the next year.

Already in the mix this month, Bridge Development paid Atlas Capital Group $68 million for a warehouse with 286,000 square feet of rentable flex space near Downtown Los Angeles. In the San Gabriel Valley submarket, UBS Realty bought a 16-acre industrial site for $32 million.