By Jack Stubbs
The industrial markets in Los Angeles and the Inland Empire are in a period of transition, with one report suggesting that, in the near future, supply will struggle to keep up with demand.
Cushman & Wakefield recently released a report, “Industrial Construction Update: Is the Market at Risk for Oversupply?”, which provided national insights as to which industrial markets might experience challenging times ahead due to a lack of available, or future, inventory coming online.
The Registry recently spoke about the report findings with Vice Chair at Cushman & Wakefield Andrew Starnes, who focuses on industrial real estate dispositions on behalf of owners, tenants, landlords and developers, specifically focusing on the supply chain and distribution markets of the Inland Empire in Southern California.
One of the main aspects that continues to characterize the Inland Empire in particular is a noticeable lack of supply. Meanwhile, extensive construction activity continues to occur.
“The question always being asked is whether the Inland Empire is going to become overbuilt with too much construction. The last ten years, we’ve built between 20 and 25 million square feet of new buildings each year, and we’ve absorbed almost that same number. So we’ve seen a really steady vacancy rate,” Starnes said.
Meanwhile, slowing construction activity throughout the Los Angeles region means that the vacancy rate has climbed over the last couple of years, according to Starnes.
“In 2022, we only built 16 million square feet, so the vacancy declined to below one percent. Now, it’s about 2.5 percent, which is noteworthy, because the Inland Empire is 600 million square feet,” he said. “The LA Basin has two billion square feet of industrial property – for every submarket to have two percent or less of vacancy is a pretty crazy number.”
One of the primary trends that Starnes has witnessed in recent quarters with regards to the Inland Empire in particular is a lack of available space on which to build projects – local jurisdictional challenges mean that, historically and moving forward, new industrial development will be difficult to achieve.
“In the Inland Empire, there’s a physical aspect, which is that there isn’t the land that there once was, both from a topography and zoning and entitlement standpoint from the cities. Southern California is probably one of the hardest places to develop in the country, from environmental and entitlement challenges at the local and state level,” Starnes noted.
“It becomes harder and harder each year. It used to be maybe 12 months to get something entitled and nine months to build. It probably takes three to five years now to get a project entitled.”
The findings from Cushman & Wakefield’s report appear to back up this assertion, with the report analyzing industrial square footage under construction as a percent of overall inventory. According to the report, the Inland Empire has 6.1 percent of total inventory under construction, while Los Angeles has 0.9 percent of inventory under construction.
These figures were significantly dwarfed by other West submarkets. For example, Las Vegas’ rate of under-construction inventory was 11.4 percent; Phoenix’s was 12.6 percent; and Salt Lake City’s was 7.3 percent.
While some of the other West markets analyzed showed similar numbers to those of the Inland Empire and Los Angeles, Starnes suspects that, as has been the status quo for more than a decade, speculative – rather than build-to-suit – projects will be the norm.
“The trend in the Inland Empire has been to build spec projects, which has been the case for the last 10 to 15 years. If you wait on a build-to-suit project, you’ll probably miss a deal. There’s been enough demand and market velocity that if you go spec, you’ll have your building leased then or shortly thereafter. This is a spec market, for sure,” he said.
In the Los Angeles and Inland Empire markets – as well as on the national scale – the industrial real estate market has garnered a negative reputation from the wider public, according to Starnes – who said that, while new construction will often be opposed, the overall state of the market will continue to have a significant impact moving forward.
“People are always going to challenge new buildings and developments, which is kind of the way it is. On one hand, industrial real estate is sort of the lifeblood of Southern California; on the other hand, I do get it,” Starnes said.
