Highest Quarterly Absorption Recorded

The Los Angeles Basin industrial market is the largest in the United States, totaling more than 1.59 billion square feet. It also has some of the highest asking rental rates, as well as one of the lowest vacancy rates, of any market in the nation. Imports at the twin ports of Los Angeles and Long Beach, which handle roughly 40% of all imports into the country, continue to be a major industrial driver for the region. In addition, the region is the largest manufacturing center in the United States, with more manufacturing jobs than the entire state of Illinois.

Net absorption in the Central Los Angeles submarket totaled negative 260,300 square feet for the quarter, the third quarter in a row of negative absorption. Vacancy has increased 20 basis points to 1.6%, among the highest for markets in LA County. Rents have remained unchanged as well at $0.67 PSF NNN. A single fully leased build-to-suit project was completed this quarter, which totaled 310,700 square feet of space. 

South Bay vacancy decreased 20 basis points to 1.2% as several larger leases occurred this quarter and market conditions remain tight in the most sought after market in LA County. New space totaling 147,100 square feet was brought to market this quarter. Industrial rents increased $0.01 over the quarter to $0.83 per square foot (PSF) triple net (NNN), their highest point on record. Rents increased 5.1% over the last 12 months, driven in a large part by newer modern industrial developments.

New space totaling 450,800 square feet was completed this quarter in San Fernando Valley and Ventura County, most of which was pre-leased prior to construction completion. These recent fully leased completions led to positive net absorption of 278,000 square feet for the quarter. Investment market conditions continue to favor the San Fernando Valley which has recently seen an influx of value-add investors continuing to purchase properties in the region. 

San Gabriel Valley construction completions this quarter totaled 379,700 square feet in two buildings, which were sold upon completion. This quarter, 542,000 square feet of Mid-Counties industrial space finished construction, all of which was pre-leased. Despite these additions, industrial absorption was negative 245,300 square feet, the first quarter of space givebacks since 2010. Average asking rents increased $0.01 over the prior quarter to $0.75 per square foot (PSF) triple-net (NNN).

The Orange County industrial market closed the second quarter with net absorption recording 176,100 square feet. Much of this positive movement stemmed from tenant move-in’s in the Airport Area submarket. There is strong demand for new industrial buildings as developers are challenged with finding available development opportunities. 

Net absorption in the Inland Empire submarket was 10.8 million square feet for the second quarter of 2018, the greatest amount of net absorption to occur in the market in a single quarter. This was due to a number of pre-leased buildings finishing construction this quarter. Construction completions were 8,469,500 square feet for the quarter with 60% of new construction being in large buildings over 500,000 square feet. 

Key Takeaways:

  • The Greater Los Angeles Basin industrial market absorbed a record 12,086,100 square feet this quarter, the highest on record. A large part of this was due to the completion of 9,9,89,100 square feet of new industrial space, much of which was leased upon completion.
  • Asking rents have remained stable at $0.70 per square foot (PSF) triple net (NNN), which remains the highest reported rental rate for the Greater Los Angeles Basin.
  • Vacancy fell 20 basis points to 2.3% and future quarters as absorption remains high.
  • There remains 23,397,600 square feet under construction as the region remains in the midst of an industrial building boom.

Outlook:

Tight market conditions, limited development and rising industrial rents are expected to persist in the San Gabriel Valley industrial market. There remains 995,900 square feet of space under construction in the submarket. The surge in rents is prompting many users to consider buying their properties, however available inventory is insufficient to meet demand.  

In the Central Los Angeles submarket, 230,000 square feet still remains under construction and is expected to be completed in the next six months. 193,400 square feet is currently under construction in South Bay and is expected to be delivered in the next 12 months. There remains 763,000 square feet of space under construction in San Fernando Valley and Ventura County, which is expected to be quickly leased once it is built.

The Inland Empire industrial submarket remains 19,792,500 square feet of industrial product under construction, of which approximately 20% is pre-leased or pre-sold. Orange County industrial product is expected to continue deplete as many properties are being sold as multifamily redevelopment land or creative office space conversion.