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Industrial Markets See Solid Growth As Pandemic Endures

Like other commercial real estate asset classes in the region, Southern California's industrial sector hit a major pause button when the coronavirus hit.

SoCal's industrial sector, led by the Inland Empire and Los Angeles County, has been seen as one of the top submarkets in the industry. Vacancy far surpassed the national average, rates were up and deals and developments abounded.

Industrial Outdoor Ventures' industrial maintenance building in Rialto, Calif.
Industrial Outdoor Ventures' industrial maintenance building in Rialto, Calif.

Two months after the pandemic grounded commercial real estate, the industrial market continues its steady momentum of deals and developments, outpacing other asset classes in the coronavirus era.

State and city stay-at-home orders and other health directives have negatively impacted the retail and office sectors, forcing many businesses to shut down or curtail operations and lay off employees. But the industrial sector, fueled by demands on e-commerce, cold storage and warehousing, is seeing an uptick in hiring and activity nationwide. 

Nationally, the industrial and multifamily sectors are going to come out of the pandemic quickly, according to CBRE Chairman of Americas Research Spencer Levy. Activity and investor sentiment are all up and growing stronger as each week passes and more states and cities open up, CBRE officials said. 

"Industrial is not only going to perform better than any other asset class with the exception of multifamily, we are actually more optimistic about industrial today than we were three months ago pre-COVID," Levy said during Flash Call: Industrial and Logistics Insights, hosted by CBRE.  

Amazon, 3PL, manufacturing, and food and beverage are driving the industrial industry nationwide. The region has enjoyed some of that growth. Nationally, the industrial vacancy is at 5.2%, according to JLL. The Inland Empire, Orange and Los Angeles County saw vacancy below the national rate at 4%, 2.6% and 2.8%, respectively.

While lease and transaction deals initially slowed in the industrial market because of the coronavirus, Southern California's sector is now poised to continue the momentum it had built up leading up to the pandemic, experts said. 

"It seems to be fairly stable," The Klabin Co. Managing Principal Frank Schulz III said. "There’s movement in the market. We're seeing leases being done and [business] people are getting back to it. We’re touring properties and getting more phone calls. It’s still not as fast-paced [compared to pre-coronavirus] but there is a general consensus we’re getting back to it."


Brett Dedeaux
President
Dedeaux Properties
Dedeaux Properties President Brett Dedeaux

Only Houston's industrial market is seeing some rent compression, CBRE Senior Vice President John Moore said during the call.

In Los Angeles, the county's industrial market saw its 23rd straight quarter in which vacancies have not surpassed 3%, according to a Kidder Mathews industrial report.  There were 517 transactions in the county in the first quarter.

A CBRE report found that the Greater Los Angeles region attracted $1.04B of capital in the first quarter, down 23.8% from the five-year quarterly average of $1.3B. But the average price per square foot rose 18.8% to $209 from the previous year, according to CBRE.

While leasing activity in the first quarter in the Inland Empire was down 38% year-over-year, rental rates continued "to record post-recession highs," according to Kidder Mathews industrial market data, which shows that number could drop later in the year.

Currently, the Inland Empire is seeing 4% vacancy and $0.73/SF on a triple net basis, according to the Kidder Mathews report. 

"I wouldn’t say [there is] an uptick from pre-pandemic but that industrial leasing activity has continued throughout the COVID crisis by industries in the right 'lane,' meaning distributing products still demanded by consumers throughout the crisis," Dedeaux Properties President Brett Dedeaux said. 

Dedeaux said industrial demand in the region will continue to be strong post-pandemic due to increased e-commerce sales, the demand for warehouse space to store inventory from consumer product companies and an increase in onshoring or domestic manufacturing.

All of that should be considered as a way "to lessen reliance on foreign manufacturers and resulting issues when there’s a disruption to complex international supply chains during events such as we just experienced," he said.

The Klabin Co. Managing Principal Frank Schulz III
The Klabin Co. Managing Principal Frank Schulz III

Schulz III said he has fielded a number of calls from clients for warehouse space either for tech uses, e-commerce, fulfillment or cold storage and from companies that are expanding in supplying personal protective equipment such as masks, face shields and testing equipment.

"Volatility creates opportunities," Schulz said. 

Industrial Outdoor Ventures CEO Tom Barbera said his Chicago-based industrial investment company is bullish on Southern California's industrial market.

The company, he said, plans to acquire more than $100M worth of assets in the next 12 months and $500M in the next five years in major markets nationwide such as Atlanta, Chicago, Dallas, Houston, Denver and SoCal.

IOV last month closed on two industrial properties totaling 37K SF in the Inland Empire. The company currently has a letter of intent for the acquisition of an industrial property for $20M in the Eastern Inland Empire and is scoping out another property in Long Beach, Barbera said. Barbera said his company specializes in acquiring supply chain and last-mile-oriented property.

"Southern California has always been on our radar," Barbera said, adding that the region's ports are important drivers. "We're just getting our feet wet in Southern California. But we expect to buy a lot more product here."