Industrial Sector To See Comeback

Industrial experts are eyeing a new opportunity cycle for the sector after a chaotic recent run that ranged from unprecedented demand spurred by the e-commerce boom of the pandemic to an eventual oversupply and subsequent rent dives.

As rent drops decelerate, as noted in fourth quarter data from Avison Young, demand for sophisticated industrial product is making a comeback at the hands of AI and data centers. The combination seems to have the market shifting to find a new equilibrium.

The post-pandemic rise in interest rates, along with uncertainty caused by tariffs, set the stage for some of the decline seen in the last couple of years, said Rishi Thakkar, senior director of investment at Santa Monica-based Dedeaux Properties, which owns and operates more than 14 million square feet of industrial real estate. Dedeaux’s holdings are primarily in Southern California, with some properties in Northern California for a total of more than $1.3 billion in assets under management.

The “run up in interest rates and how rapidly they rose… really flipped the script,” Thakkar said. “As developers, you build to a certain yield thinking that you’ll be able to finance on the back end of that, but that back end financing eventually evaporated.”

The consequences of capital’s disengagement from industrial are now paving the way for opportunity. Both Thakkar and Hans described Southern California industrial real estate as being “on sale,” with assets trading below replacement cost and at values not seen in years. This has encouraged capital markets to get back in on the action.

In Greater Los Angeles, fourth quarter sales volume reached $1.2 billion, an increase of 8.6 percent quarter-over-quarter and 6 percent year-over-year, according to CBRE. Thakkar said Dedeaux has felt this shift, noting that for the last two years, the firm was making more calls to capital partners than they were receiving, but that this has recently reversed.

The current trend seems to reflect an evening out after the market “hit the bottom,” preceded by a period of “unprecedented demand in leasing absorption,” Jason Hans of Affinius Capital said.

An increased need for taller, more “sophisticated” spaces has developers eyeing opportunities, spurred along by lower construction costs, Hans said.

“Contractors are now hungry for work, so hard cost bidding has definitely come down,” Hans said. “…We are very bullish about new development that’s going to be delivered in late 2027 and into 2028 as we’re beginning to see markets starting to tighten with a very limited development pipeline.”

Hans did note, however, that based on asking rents and leasing activity, he anticipates the western portion of the Inland Empire will be the first to see a development surge, while the eastern portion may take another year.

Another consideration for new product will be the power capabilities of a given area.

“That’s going to be the next big sort of gold rush,” Thakkar said, pointing to the increased power needs that come with AI and advanced manufacturing. “Power is going to be the biggest hindrance to growth here in Southern California and nationally.”

As of the fourth quarter, Greater Los Angeles had a 5.2 percent vacancy rate for industrial, according to CBRE, compared to 6.7 percent nationwide.