Industrial Lease Rates Expected to Grow 7.3%

Industrial lease rates in Los Angeles will likely grow by more than 7% this year. According to the second quarter report from CBRE, industrial lease rates increased by 3.8% in the last quarter and will likely close the year up 7.3%. It’s now surprise that limited supply is behind the rapidly rising lease rates. The same report shows vacancy is now at 1.2% market wide and drops lower in some popular submarkets. Vacancy is down 20 basis points, which is nominal but expected considering the limited availability, with positive absorption of 707,569 square feet.

“The main factor here and the obvious factor is supply and demand. We have such a lack of available product, especially class-A product,” John Hillman, VP at CBRE who specializes in the Central L.A. industrial market, tells GlobeSt.com. “A lot of the available properties are functionally obsolete. With a lack of supply, you are going to have an increase in rental rates. With the increasing rental rates, there is strong competition for space, but the renewal rates also play a factor. Landlords are in a strong position because they can really set the price and negotiating on lease renewals. Landlords have had the ability to really push renewal lease rates.”

The demand is unyielding, with 3PLs and ecommerce users driving a large portion of the transaction activity. However, the dearth of supply could begin to slow the leasing activity. If there is nothing to lease, transaction volumes will inevitably fall. “The only thing that will slow vacancy rates down is the lack of supply,” says Hillman. “There is a ton of pent up demand, and when buildings do come to market, there is no lack of interest or absorption.”

Of course, lease rates will continue to rise as supply becomes more limited. Preleasing activity on new development has been a signifier of demand—tenants want to lock in new space whenever they can. However, with lease rates rising so quickly, developers are now waiting to prelease a project closer to completion to ensure the highest rate possible. “Developers would rather take the gamble and wait 10 or 12 months when the building is deliverable to realize a much higher rent,” explains Hillman. “They will capture a much higher rent with that strategy rather than preleasing at a lower rate. We are seeing developers waiting until closer to completion to start negotiating leases.”

The lease rates will seemingly continue to rise through the end of the year and beyond. “We are going to continue to see more rent growth,” adds Hillman. “The economy is strong, and that is going to lead to strong demand. That will continue to push lease rates.”