The Los Angeles industrial market hit a nearly 15-year high vacancy rate in the second quarter. But as one of the busiest warehouse markets in the country, the area is still in an enviable position.
That 14.5-year high is 3.7%, according to Newmark, an indicator of the strength of the market over the last decade and a half and the breathing room allowed by recent shifting tides in demand. Tenants are cutting back on space, and the LA area, with its above-average rates, is a prime target.
“The market became too rich too soon,” Newmark Southwest Head of Research Dain Fedora said, referring to the record rent growth the region saw during the pandemic. “Once consumer goods spending decelerated, a lot of distributors looked at their excess space and figured out ways to cut costs.”
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Major vacations included bankrupt 99 Cents Only moving out of 620K SF in the market, while apparel company VF Corp. and Huffy left behind 530K and 339K SF, respectively, Newmark found. Overall, sublease space in the market was up 11.6% quarter-over-quarter to 9.7M SF, according to Newmark.
About 70% of the sublease space available in the LA market is in infill markets, which in Newmark’s report includes the South Bay and the Mid-Counties area.
Rents are higher there than in other parts of the market and are traditionally heavy on third-party logistics and distribution companies. These tenants are not only very price-sensitive, they’re also tied to the business ups and downs of major retailers, Fedora said.
Monthly rents across the Los Angeles industrial market averaged $1.61 per SF in the second quarter, down from $1.77 at the same time last year.
“As rents continue to cool, there will be more leasing activity in the marketplace,” Fedora said.
Leasing “plodded along” in the second quarter, reaching 9.5M SF from the previous quarter’s 8.6M, and will continue to be relatively sluggish until rents drop, Fedora said.
The buildings that had leasing activity in Q2 were aggressive and imaginative in their efforts to attract and retain tenants, utilizing combinations of free rent spread throughout the term of the contract and other perks, Fedora said.
“There's creative ways to offer concessions to tenants without taking a severe haircut, on the surface, to one's rents,” Fedora said.
Allowing early occupancy on a lease is a common concession these days, he said.
Vacancy is likely to stay up for the next 12 or so months, Fedora said.
The market “is still at a bit of a standstill,” he said.
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