SoCal Industrial Market Isn’t Losing Its Crown

The Southern California industrial market is well positioned to weather the economic storm set off by the global pandemic. Heading into the current market dislocation, the industrial sector had low vacancy and a limited new construction pipeline—and limited land for new construction. Now, the pandemic has catalyzed a new wave of ecommerce activity, accelerating trends by a decade or more, some are estimating, and a lack of liquidity for new construction. “Bottom line, industrial will come through this year stronger than before,” Kurt Strasmann, regional industrial market leader at CBRE, tells GlobeSt.com.

New ecommerce activity in particular will play a role in industrial resilience through the next recovery cycle. “The emergence of ecommerce plays in perfectly for industrial demand on multiple levels, both cold storage and typical online sales from fulfillment as well as onshoring,” says Strasmann.

Social distancing and stay-at-home orders have only served to increase online shopping. “While much of the data is preliminary, a variety of market observers have captured a striking increase in e-commerce, accelerating in mid-March as the nation’s retailers began to close their doors,” says Strasmann. “An accelerated adoption of e-commerce could persist past the immediate crisis if consumers grow more comfortable buying a wider range of goods from online retailers. Already, many e-commerce companies are operating at a greater capacity than peak holiday season with the biggest player in the field having announced plans to expand their workforce by 100,000 workers nationwide.”

This crisis is certainly unique, but the former recession might also provide a lens into industrial performance during a severe economic dislocation. “The financial crisis had a dramatic negative impact on key industries that support the regional industrial inventory: yearly port volumes at the peak of the recession in 2009 were down 25% compared 2007, and manufacturing & distribution employment declined by 111,200 throughout the GFC. Vacancy rates for regional industrial assets peaked at 5.01% in Q4 2009, and asking rates declined 26%,” says Strasmann. “While it took nearly 8 years for rates to return to previous highs, the strikingly low vacancy highlights the sector’s relatively stable demand base.”

While the market is certainly well positioned to weather this storm, no industry is immune to the effects of this pandemic. The pandemic’s impact on global trade will certainly affect the industrial market, particularly in Southern California, which is home to the largest port system. “The spread of the coronavirus and associated economic contagion is having dramatic, immediate effects on global trade. The IMF estimates that global trade will decline by 11% in 2020, slightly less than the 14% decline seen in 2009,” says Strasmann. “The impact is already being felt locally: port volumes are at their lowest level since 2009, declining 20% from 2019. Between 10% and 15% of the regional warehouse inventory is port-related. However, the dislocation from a drop in global trade—while severe—may prove temporary: China’s manufacturing has already begun to rebound and ship departures from China have increased.”