With a possible recession on the horizon, industrial professionals are wondering if the Southern California market’s meteoric rise is headed for a near-term pause.
“It’s a time of uncertainty when interest rates are going up, who knows what’s going to happen,” Matthews Senior Vice President and Senior Director Alexander Harrold said at a Bisnow event this week. “It used to just be, ‘Hey, we got a bunch of money. Let's go spend it. What do we want?’ Now, it's more of, ‘What do we need? What could withstand the possible recession?’”
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Though Harrold and other speakers were confident in the overall strength of the market, due to high barriers to entry, pent-up demand and a constrained supply of land or sites for new product, most anticipated shifts or were already seeing them in land prices, lease terms and in waning demand for certain property subtypes.
Harrold said he anticipated this selectivity playing out in a slowdown in SoCal deals with long-term leases attached to properties, because of rising interest rates, and in transactions involving Class-B and C buildings.
Rexford Industrial Realty CEO Howard Schwimmer said he expects to see some sellers take properties off the market and wait to see what happens, rather than hold out for a top-of-the-market price.
“It seems like what we're seeing is, sellers have realized now that the market did peak, so those expectations are coming down,” Schwimmer said.
Kidder Mathews Executive Vice President Richard Putnam said he’s seeing land costs shift.
“We think land is definitely pulling back, and that's sort of the biggest price moderation right now,” Putnam said, attributing the change to the high cost of borrowing as well as higher costs related to construction. “There's no question that we'll see a little moderation in pricing, but we're certainly seeing it land right now.”
Interest rate hikes, rising costs and recession fears might be causing people to pump the brakes a bit, but the Southern California industrial market is still a powerhouse.
Year-over-year, 33.9M SF of new construction was added to the Southern California industrial market, but the vacancy rate barely budged. Year-over-year, it dropped just 90 basis points “due to the unrelenting demand for industrial space,” according to NAI Capital. Quarter-over-quarter, the vacancy rate rose just 20 basis points and now sits at 1.5%, the firm said.
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Though these changes are slight, they are worth highlighting because “it just denotes how tight the market continues to be,” NAI Capital Managing Director of Research J.C. Casillas told Bisnow in an interview.
“Supply chain issues, escalated costs, and new construction will weigh on the industrial market,” NAI’s report said. “A reluctance to add additional space will cause demand and supply to rebalance in the second half of 2022.”
Looking at the longer term, speakers at the event had nothing but confidence in the strength of industrial in Southern California.
“Over a long period of time, the values are going to go up,” Schwimmer said. “Our Southern California markets don't have any land, we’ve operated at 1% or less vacancy, and now is maybe an opportune time to buy when you find some more interesting deals.”
It is advice his own company has followed: The industrial REIT spent nearly $1B in 2022 as of late June, the Commercial Observer reported.
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