Industrial Tenants in Southern California Making More Budget-Conscious Decisions

Almost 170 Class B industrial leases were signed in the second quarter of this year in the Los Angeles-Orange County-Inland Empire area. That was significantly more than the 72 Class A transactions and the 106 Class B leases that had been inked during the same period last year, according to CBRE, indicating a shift to more budget-conscious options for industrial tenants in this region.  

Class B transactions also accounted for a large share or 37.8% of total leasing by square feet in the same second quarter, up from 25.8% in last year’s same period. The share of total leasing activity from Class A transactions in the same period decreased to 49.7% from 61.7%.

But variations in deals reflected differences in renewals, size and specific segments of the industry, making a deeper dive worthwhile.

Renewals. With the transactions made, renewals told a slightly different story of who came in first. Class A transactions represented 39.4% and Class B were 26.2%. But both were up—Class A from 22.4% a year ago and Class B from 19.0%.

Size of deals. Smaller transactions outpaced larger ones in the second quarter of this year. Lease transactions of 100,000 square feet and smaller accounted for a whopping 82% of the total number signed in the second quarter of this year, which was also up a staggering 79% from a year ago. For the 46 new direct leases above 100,000 square feet signed in the first half of this year, food and beverage led the way in area leased with more than 4 million square feet signed with more in Class A; third-party logistics came in second, again with more in Class A than B.

Newer products. More than 16 million square feet of Class A product was leased in the first half of this year in Inland Empire versus just 5.3 million square feet of Class B. But more Class B space was leased in both Greater Los Angeles with 6.9 million square feet and Orange County with 2.3 million square feet for a total of 9.2 million square feet.

Subleases. Here there’s been a dramatic change with subleases available and the majority in Class A space, followed by Class B space and then Class C. Altogether, the subleases tripled to 13.78 million square feet in the second quarter of this year, from 4.26 million square feet in the same period a year ago. The Inland Empire saw a rise of 4.9 million square feet YoY in subleases, with Greater Los Angeles climbing less but 3.2 million square feet and Orange County also increasing but even less with 1.5 million square feet more in the same period. 

Deal terms. Class A and B buildings also reflected different lease terms with the A buildings averaging longer terms in all three markets. The spread between A and B in Orange County was two months but 11 months in Los Angeles and 13 months in the Inland Empire. And the spread in average effect rents also varied between A and B. The big buzzword for the bottom line is flexibility with more tenants being more budget conscious, taking lower-quality space for less rent and on shorter terms, according to the CBRE report.