Small-Box Industrial Users Face the Biggest Supply Challenges

The industrial market in Los Angeles is facing major supply challenges across product types—but users of small-box spaces may be facing the biggest hurdles. Owner/users specifically are finding few acquisition opportunities and are paying high prices to compete with investors for quality space—especially with rental rates expected to increase nearly 8% this year.

“Users seeking industrial buildings in this size range of approximately 25,000 to 45,000 square feet, in Los Angeles County and across Southern California, are facing a challenge. Due in part to skyrocketing land costs, most new industrial buildings coming to market are in the 100,000 square-foot-plus range,” Dennis Sandoval,” EVP at DAUM Commercial, tells GlobeSt.com. “This lack of available supply has led to many smaller industrial users leasing space in larger warehouses and distribution centers that allow multiple tenants to share space on a flexible basis. Those who desire ownership might even partner with another user to acquire a larger facility, which can be a strong solution. That said, this can understandably cause some operational challenges in the long run.”

DAUM recently completed the sale of seven small-box industrial properties at the Echelon Business Park in the City of Industry on behalf of owner and developer Dedeaux Properties. Each of the seven building fell in this popular size range—27,438 to 43,166 square feet—and received offers from owner/users before ground breaking. The total sales price for the seven buildings was $50 million. The strong demand illustrates the need for this size range in the L.A. industrial market, which is currently catering to larger ecommerce users. “These rapid sales demonstrate the continuing high demand for industrial space in Los Angeles County. For smaller industrial buildings in particular, the demand for ownership far exceeds the supply,” says Sandoval. “Echelon Business Park fills a large void in the market, making the decision to build and sell these buildings now a highly strategic choice. In the San Gabriel Valley, vacancies for smaller, newer industrial buildings are under 1%, even less than the already tight overall industrial vacancy of approximately 1.5% in the submarket.”

Dedeaux Properties realized the pent-up demand for small-box spaces when it purchased the land site in 2017. The firm chose to build for-sale small box buildings to fulfill the demand, and was under contract on all seven space before ground breaking, plus back-up offers. Six of the buildings were purchased by an owner/user while an investor in a 1031 exchange purchased the seventh. “These were user sales, driven by the pent-up demand for building ownership in this marketplace,” adds Sandoval. “The user market remains very strong, despite the fact that pricing has plateaued a bit. There were very few investors who could underwrite the purchase at return thresholds that made sense based on the projected purchase price of subject properties.”

Despite the fervent need for more industrial product, large and small, the San Gabriel Valley industrial market is strong. “The greater San Gabriel Valley market remains very solid and business optimism remains high,” says Sandoval. “Businesses are expanding, business equipment purchases are increasing, forklifts and racking system sales are up, and hiring has increased. Overall the market appears to be steady, with no major ‘red flags’ on the horizon. Even with tariffs and increasing interest rates, the overall opinion is the long-term view of the economy is positive. Industrial real estate is proving to be a very solid sector. Institutional investment funds are increasing their commitment to invest in more industrial real estate nationally.”