How Developers Are Creating New Industrial Supply With No Land to Build
Industrial conversion projects are at an all-time high in Southern California with 12 projects announced already this year alone.
Before the pandemic, Southern California was home to the leading industrial market in the country with vacancy rates at record lows and a massive construction pipeline trying to keep up with demand. Then, during the shelter-in-place orders, ecommerce shopping skyrocketed, a record number of containers traveled through San Pedro Port complex and industrial demand reached a new record.
The event has deepened supply-demand imbalance in Southern California, and now developers are looking for every way to bring new supply to market. A new JLL report titled Finding Any Opportunity to Build highlights the trend toward industrial conversion projects as one way to deliver new supply to market despite limited availability of land. This year, 12 industrial conversion projects have broken ground or been announced, and office buildings in industrial-zoned areas are the prime candidate for such projects, according to the report. Orange County is home to the largest number of industrial conversion projects with nine of the 12 projects underway. All 12 projects will deliver 160,000 square feet of industrial space to the market, helping to ease the record low 1.3% vacancy rate, although only adding a small fraction of space to the total supply.
JLL suspects that this is just the beginning for industrial conversion deals, especially as the vacancy rate continues to compress toward 1%. However, while this is a popular concept to increase supply, the report also notes that there are limited existing properties with permissible zoning for an industrial conversion.
Keeping up with demand has been a challenge for industrial developers. Despite record levels of new construction activity across the country, industrial users are still challenged to find space. In Prologis’ third quarter earnings call last year, CEO Hamid Moghadam was blunt in his assessment of the industrial sector’s supply-demand equilibrium: “With vacancies at unprecedented lows, space in our markets is effectively sold out.” Prologis reports that construction starts have risen to an all time high of 120 million square feet, with speculative construction representing roughly 88% of all starts in the quarter. But pre-leasing has also reached its own record of 70%. That, coupled with construction delays, which are spreading out deliveries, means the risk of oversupply is low.