Identifying SoCal Industrial "Market Outliers" Ripe for Investment

Geospatial analytics are being applied to transaction patterns in Southern California industrial markets, using algorithms that identify “market outliers” that present unique investment opportunities in one of the nation’s busiest industrial regions.

Testing the theory that every real estate transaction provides a data point in a broader spatial pattern that can paint a picture that reveals where the outliers are, CBRE Econometric Advisors (CBRE EA) mapped all the industrial property sales in SoCal over the past two years.

CBRE EA applied geospatial analytics to identify trading patterns. The company says it algorithmically identified 47 deal clusters, which it numbered on a map, identifying which clusters had deals exhibiting low price and high rent, high price and low rent, and areas where prices and rents were low, and other possible permutations.

Generally, the clusters overlap the region’s key industrial nodes. To generate a proxy for relative value, CBRE EA said it averaged the price per SF for each property sold and the typical in-place rent within each cluster. Clusters are color coded on the map to illustrate how these metrics relate to the broader regional average.

The results show that clusters in densely populated places with elevated land values tend to achieve both high sales prices and rents. Conversely, despite heavy sale volume, buildings in the Inland Empire traded at average-to-slightly discounted prices, likely reflecting their relatively lower replacement costs and a decade-long construction boom that suppressed rent levels.

Regarding the market outliers, CBRE EA’s report said investment clusters in Los Angeles County, from Covina, south to Buena Park, and into the northwestern corner of Orange County generally offer higher rents at a higher price per SF A similar trend can be found within the far northern tier of Los Angeles County, including in Northridge and Santa Clarita.

“Industrial properties in many of these markets tend to be smaller and cater to a local tenant base. Thus, they are often not on the radar of institutional investors,” CBRE EA’s report said.

“Smaller properties with fewer credit tenants may have limited appeal at a time when investors are risk averse. However, as market conditions improve, they may offer a compelling opportunity due to their lower price per SF and above-average rents, as well as a modest new construction pipeline in the local area,” CBRE EA said.

The geospatial analytics made use of a data-clustering algorithm that is a density-based clustering non-parametric algorithm—meaning that given a set of points in some space, it groups together points that are closely packed together (points with many nearby neighbors) and it marks as outlier points those that lie alone in low-density regions (whose nearest neighbors are too far away).

Market conditions finally have begun to shift in what has been the nation’s hottest industrial market for the past year: vacancy rates ticked up and rents ticked down in SoCal’s Inland Empire in the first quarter.

The overall industrial vacancy rate in Inland Empire—which last year was as low as a microscopic 0.4%—increased 60 bps to 2.8% in Q1 2023, according to a new market report from Savills.