Industrial Leasing Slows in First Quarter

Los Angeles industrial leasing slowed down. According to research from JLL, total leasing volume was down in the first quarter with vacancy staying at 2.2%, even as leasing velocity and demand remained strong and rental rents increased—up to $10.08 per square foot. Experts can’t pinpoint the cause of the shift, but it could be caused be low lease renewals or low available supply of new product.

“We are feeling an overall slowdown in the infill markets though we are not exactly sure what this is caused by,” Paul Sablock, managing director at JLL, tells GlobeSt.com. “It could be that many tenants have renewed and this information does not make it into the system. New deals are easy to track but renewals are not. Also due to the lack of product, overall new leasing is down. No options, no deals. However, there is approximately 1 million square feet of new product hitting the Central Marketplace in the next six to nine months.”

New construction activity could help the latter later this year. There is currently 6 million square feet in the construction pipeline, however, nearly 1 million square feet has already been preleased. While new deliveries could fuel leasing volumes, Sablock says that the rent premiums for this product won’t guarantee it. “New development lease rates are so high that it will be interesting to see if there is enough corporate demand as the typical mom-and-pop entrepreneurial world is not capable of paying these rates,” he says. “There are always exceptions, such as high flying garment firms. It will be interesting to see how this plays out over the next six months.”

Redevelopment of dated product is another option to bring more product to market, but these opportunities are not readily available. There has been an increase in cold calls to suss these deals, but Sablock doesn’t expect a significant increase in these projects. “Redevelopment activity does not just happen because the market needs it or wants it to happen. Redevelopment opportunities have going concerns in the space.  Until such time as the going concern decides to close up shop the opportunity is not there.  Even at the current high land prices in the market,” he says. “The development community has also started to cold call the market internally due to the lack of product.  So if there are opportunities out there, they will be uncovered.”

Looking ahead, the JLL report expects more of the same. With a lack of product and high demand, expect lease rates to continue to increase as net absorption is on par or lower than recent trends. This could be a sign that the market is nearing its peak; however, expect strong momentum in the San Gabriel Valley and Inland Empire markets as a result of the tight supply in L.A.