Economic Woes, Port Slowdown Tap Brakes On SoCal's Industrial Market

A long-anticipated slowdown for SoCal's top industrial markets has arrived, bringing negative absorption, a continued increase in vacancy and more slowly rising rents in the first quarter.

But whether it is a normalization or something more serious remains to be seen.

In the first three months of this year, the greater Los Angeles industrial market had negative net absorption of 3.7M SF, according to Savills. It was the second quarter in a row in which the market had negative absorption. Vacancy in the market was 3.2% — up about 50% year-over-year. 

Tenants in South Bay alone gave back 1.3M SF, a decline that Savills Research Manager Caitlin Matteson said is “because of all the challenges that are going on with the ports.” 

Still, Matteson said what seems to be happening is more of a normalization than anything that could be termed a true decline. 

“I wouldn't say there's cause for alarm yet,” Matteson said. 

The Port of Los Angeles saw a 43% decline in cargo volume in February compared to the same month the previous year. In March, the drop-off slowed — there was a 35% annual decline in cargo — but was still down compared to 2022, according to figures from the port.  

At a press conference last week, Port of Los Angeles Executive Director Gene Seroka said the first quarter of 2022 was the best first quarter on the books for the port in terms of cargo, but he also said the cargo volume in the first three months of this year was down more than 19% compared to the average Q1 volume for the last five years. Seroka called the decline “a disappointing trend that needs to be reversed.” 

Nodding to March's improvement over February, Seroka said that while April numbers aren't in yet, they would ultimately show another “gradual” gain. 

Seroka chalked the soft port totals up to a handful of factors like ongoing uncertainty around extended labor negotiations at the ports and reduced consumer discretionary spending due to high interest rates and a high cost of living. 

“Retailers are still bearing the warehousing costs of elevated inventories, so they're pumping the brakes on importing more goods,” Seroka said. 

It isn't just Los Angeles. Nationally, logistics companies have seen the effects of slower demand for e-commerce. Companies that deliver packages, trucking businesses and warehousing companies cut nearly 17,000 jobs across the country in February, The Wall Street Journal reported. 

In Chino, a Walmart fulfillment center gave notice to the state employment development department that it plans to eliminate positions for about 950 employees at the site. It is unclear what percentage of total workers at the center that represents, but the facility itself, a 1.2M SF property the retailer moved into in 2016, doesn't appear to be closing entirely. Walmart announced plans to let go 2,000 workers earlier this year but didn't mention California locations at the time. 

The Inland Empire, a top market for industrial real estate nationally, is also seeing a slowdown, though the effects seem to be moderated for the time being. 

“One thing that's been driving our market for the last couple of years is this crazy rent growth that we're seeing,” Colliers Western Regional Industrial Capital Markets Lead Michael Kendall said. “And now that that absorption is slowing and lease activity is slowing, there's more options out there for tenants [and] there's less upward pressure on rental rates.”

Vacancy in the market rose 100 basis points to 1.9%, according to a first-quarter report from Colliers. The surge of new supply in the market contributed to that increase, Colliers reported. 

Net absorption in the Inland Empire was 2.4M SF. Kendall said for a market that absorbs about 20M SF or 25M SF per year, that quarterly figure is “way off pace” so far to hit the average. 

“Is this a blip, the slowing of absorption, and is it going to rebound next quarter?” Kendall said. “It's a little too early to know.”