The industrial real estate landscape in Los Angeles County has pivoted from an era of soaring demand for warehouse space to an environment marked by a surplus in supply. This shift, characterized by a surge in completed constructions and an upswing in vacancy rates, denotes a market that is recalibrating its equilibrium, according to the recent NAI Capital Los Angeles County Industrial Market Outlook Q3 2023 report.
The third quarter of 2023 witnessed a 338 percent increase in completed construction projects, resulting in an upsurge in vacancy rates, now resting at 3.9 percent — the highest in a decade. Additionally, approximately 3.1 million square feet in the third quarter alone and a cumulative 4.9 million square feet over the past five quarters have contributed to this newfound supply abundance. Simultaneously, absorption rates showcased a negative trend, accounting for a deficit of 16.2 million square feet during the same period.
The e-commerce boom, a catalyst driving the ongoing demand for warehouse spaces, appears to have largely plateaued. Cargo volumes at the Ports of Los Angeles and Long Beach, major determinants of warehouse space demand in Southern California, dropped by 23.1 percent year-to-date as of August. Consequently, the development frenzy to match this demand seems to be adjusting to a more stable trajectory, adds the report.
With supply chain disruptions abating and leasing activities moderating, companies that had expanded warehouse spaces during the pandemic are now seen to be downsizing, leading to a record high in vacant sublease spaces. This surplus availability — up by 19.6 percent from the previous quarter and 397 percent compared to the same period last year — has given tenants a variety of options. Consequently, leasing volume has declined by 5.5 percent, amounting to 26.3 million square feet year-to-date, while sales volume dropped by 32.8 percent in the same timeframe. Average sale prices have also seen a notable decrease of 18.5 percent year-over-year, reflecting the current market adjustments.
Looking ahead, the report states the market anticipates a continued downward pressure on pricing due to a confluence of factors—rising interest rates, a decelerating economy and weakened demand. However, the surplus in available industrial spaces presents a silver lining for tenants seeking options at potentially lower rates. Companies seeking cost efficiencies are likely to capitalize on this surplus, thereby showcasing the market’s resilience amidst changing dynamics.
While leasing volumes have been on a downward trajectory over the last five quarters, developers have been innovating to circumvent land constraints, although completed developments hover around an average of just under one million square feet. In contrast, sales volumes displayed a resurgence in the third quarter of 2023, more than doubling from the previous quarter, but marking a 40.1 percent decrease from the prior year. The average cap rate, however, has reached 4.6 percent.
The report concludes that the industrial real estate sector in Los Angeles County is undergoing a significant recalibration, marked by an oversupply of spaces, shifting demand dynamics, and a market poised for adjustments. As the industry navigates these changes, stakeholders will likely need to adapt strategies to capitalize on the evolving opportunities and challenges that lie ahead in this transformed landscape.
