Industrial Rent Growth as Far as the Eye Can See

If we tell you that a major metro area posted negative net absorption totaling minus 2.6M SF in its industrial market in Q1 2023, you’d probably expect us to tell you that asking rents in that market are retreating in the face of macro headwinds.

But despite a major paradigm shift in 2022—the diversification of supply chains that has seen a shift of container shipments from the ports in Los Angeles to East Coast destinations—the outlook for the industrial market in Greater Los Angeles is for rent growth for years to come.

The industrial vacancy rate ticked up to 1.3% and availability increased by 50 bps QoQ to 3.6% in the first quarter in Greater Los Angeles, but asking rents continue to shatter records:

Industrial asking lease rents have increased for 11 consecutive quarters in the Greater Los Angeles region, reaching a record high of $1.69 per SF in the first quarter, according to a CBRE’s market report. Occupancy is sitting at 98.7%, which is below the peak of 2022, but still enough demand to drive rent increases.

The South Bay reported the highest asking rents for the third consecutive quarter at $1.98 per SF followed by the Mid-Counties at $1.74 per SF and the San Gabriel Valley at $1.72 per SF. Posting the largest increase quarter-over-quarter (4.5%) in Los Angeles, the Greater San Fernando Valley reported $1.61 per sq. ft. and retains the highest concentration of entertainment infrastructure in Southern California.

CBRE is projecting that rent growth will remain strong in Greater L.A. for the next five years. “Rents are forecasted to increase by 4.6% on average each year through 2028 as occupancy remains near 99%,” the report said.

Available space in Greater Los Angeles will be impacted by more than 1,000 industrial leases expiring in 2023, the report said.

“Well-capitalized tenants have an opportunity to lock in long-term leases on previously occupied space by taking advantage of macro-economic headwinds, while others seek to reposition their footprint due to affordability and technology,” CBRE said.

The Greater San Fernando Valley sustained the lowest vacancy in Greater Los Angeles in the first quarter at 0.6% as well as the lowest availability rate at 1.9%, the report said.

The Mid Counties had a vacancy rate of  0.8% and availability at 2.5%. Central Los Angeles and the South Bay boasted the highest availability rates of 5.5% and 4%, respectively, and together made up 61% of the total vacant square footage in Greater Los Angeles.

As rising interest rates took their toll, industrial sales transaction activity plunged 75% in Greater Los Angeles in the first quarter, dropping from $4.7B in Q4 2022 to $1.15B.