Rexford weathers industrial slump by focusing on smaller warehouses

Rexford Industrial Realty knows something other industrial landlords may not: smaller boxes means fuller boxes.

The Los Angeles-based real estate investment trust is weathering a national warehouse slump by focusing on smaller buildings that average 26,000 square feet, Bisnow reported, citing an earnings call. The numbers appear to say it all.

In June, Rexford’s warehouse vacancy was 2.7 percent, beating the overall Southern California infill market vacancy of 3.9 percent. Across the nation, the industrial vacancy was 7.1 percent, from 4.7 percent a year earlier.

During its second quarter earnings call, Rexford took pains to set itself apart from the wider industrial market, especially pertaining to the bigger boxes that were the focus of rent increases during the pandemic. 

Rexford reeled in $79.8 million in net income in the second quarter, up 55 percent from the same three months of last year, according to financial filings. Its total revenues hit $237.6 million, up 21 percent from the same period last year. 

The firm’s executives stressed that Rexford’s average warehouse measures 26,000 square feet, a market that has a higher barrier to entry, especially in Southern California.

Rexford tenants are renewing their leases even though they have 4 percent increases baked in, indicating those tenants seem to be anticipating future rent increases marketwide and are content to stay put, its executives said.

While Rexford conceded it expected “a nominal level of volatility” in the near term, it is bolstered by anticipated rent growth.

“The long-term outlook for our infill Southern California market remains very positive due to a virtually incurable long-term supply-demand imbalance,” Rexford Co-CEO Michael Frankel told analysts. 

Nationally, net absorption for industrial property declined year-over-year to 45.5 million square feet, from 74.4 million last summer, according to a second quarter report from Savills.

Across the Southland, the market has seen record low vacancies grow as consumer spending has dropped, according to a second-quarter report from Newmark. The report predicted a rise in vacancy “for the foreseeable future,” as well as a rise in sublease space. 

Rexford said that it had eight new subleases totaling 275,000 square feet inked in the second quarter. 

Despite its niche focus, the firm said it’s keeping an eye on the pressure affecting industrial properties, large and small. The continued loss in third-party logistics tenants has had a ripple effect across the wider market, Rexford executives said. 

“In the 3PL world, there’s been excess capacity, and that capacity has to get absorbed before you see any dramatic increase in leasing,” Rexford Co-CEO Howard Schwimmer told investors.

Rexford is also watching for shifting policies around tariffs that could go into effect after the presidential election. Planning for a return of tariffs has some foreign manufacturers on the hunt for space in Southern California, the company said. 

Then there’s the recurring issue of getting adequate power to industrial properties, something that would only become more important if manufacturing users were poised to grow their footprints locally, Rexford’s leaders said.

San Francisco-based Prologis, the nation’s largest industrial landlord, reported an 18 percent drop in revenue last quarter to $2.01 billion, down from $2.45 billion in the same period a year ago, according to an earnings call.

The industrial giant blamed the decline on rising warehouse vacancies because of excess supply and a waning demand after the pandemic e-commerce boom. For a market turnaround, it’s set its sights on a demand for data centers and artificial intelligence.

— Dana Bartholomew

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