Is L.A.’s Industrial Sector a Sign of Danger or Normalcy?

Understanding the future often requires attention to trends as they develop. Sometimes they start in one notable place where it might seem that they couldn’t. It then becomes a question of whether come contagion is about to spread.

The industrial sector in Los Angeles is showing such a point, according to Moody’s Analytics CRE. After rocket-driven growth over the last few years, the city was “2nd of 47 metros tracked by Moody’s Analytics CRE nationally in rent growth in 2022 and ranking 8th of 47 metros in absorption in the same year.”

Now, Los Angeles is “once again leading the way, but this time in the opposite direction.” In the third quarter of 2023, after months of there was a warehouse and distribution effective rent dropped by 0.6% quarter over quarter.

Is this a one-time anomaly, adding some jitter to the ongoing dataset, or something more? After all, this is just a slight drop in a quarter.

“To answer the question of whether these recent dynamics in the warehouse/distribution subsector in Los Angeles could be an early warning sign, a veritable canary in the coal mine, of rent growth recalibration, other key industrial metros in the area are examined,” they wrote.

“While no market took as big of a dip as Los Angeles in the third quarter, a few others on the West Coast have seen rent growths grind to a relative halt. For instance, San Bernardino/Riverside, the second largest warehouse/distribution metro in the country by square footage, is one to watch as its effective rent growth cooled off by only increasing 0.3% in Q3. Similarly to Los Angeles, this dynamic in San Bernardino/Riverside is occurring on the heels of incredible growth in both 2021 and 2022 as it was the top-ranked metro in rent growth in both years.”

Moody’s looked at breakdowns of parts of Los Angeles as well. The South Bay and Central Los Angeles sections saw quarter-over-quarter declines of 1.1% and 1.0%. But the San Gabriel Valley and North Los Angeles submarkets saw rent growths of 1.4% and 1.3%. “Of the four remaining submarkets that comprise Los Angeles warehouse/distribution, three saw negative rent growth, albeit at a lesser pace than the aforementioned South Bay and Central Los Angeles areas,” they wrote.

As they continued, exponential growth isn’t indefinitely sustainable, particularly since exponential growth means the change keeps growing faster. But even linear growth isn’t sustainable without end.

Important to remember is how not so long ago the economy was twisted around with supply chain issues and then the rush of products into the U.S., particularly in the Port of Los Angeles. There was heavily growing demand for warehouses to hold the products as they came in. The environment has smoothed out and the backup is ending. If demand slows, then eventually supply will as well, and so will pricing. Rather than seeing this as a disaster, it’s more likely a return to a more normal pace and pricing.