- The Southern California industrial market is returning to pre-pandemic vacancy and rental rates.
- Currently, there’s an oversupply, particularly in smaller segments, due to high levels of new construction.
- Experts think softening demand is temporary, with SoCal’s strong fundamentals expected to drive future demand.
According to a recent ConnectCRE survey of the industrial sector, industrial leasing in Southern California is finally cooling down and returning to pre-pandemic levels.
Supply and Demand Dynamics
Lexi Geiger, Director of Acquisitions at Bixby Land Co., explained that unprecedented e-commerce demand during the pandemic drove leasing up significantly, pushing some older tenants out of the SoCal market.
However, as online sales slowly stabilized, industrial owners and operators were forced to adjust to delayed construction projects that delivered more space than is currently needed. According to Jeff Rinkov, SVP and CEO of Lee & Associates, industrial vacancy and rental rates are both returning to pre-pandemic levels, particularly for small- to mid-size properties.
Carter Ewing, Managing Partner at CT Realty, noted that the supply glut in Southern California’s industrial market is primarily due to macroeconomic factors and recent high levels of new construction. The oversupply is worsened by more discounted sublease listings, which are softening tenant demand.
James Camp, Senior Managing Director at Rockefeller Group, highlighted that the Inland Empire market has been particularly impacted, with Phoenix and Las Vegas markets outperforming the once white-hot CA market for the first time in his entire career.
West Coast Best Coast?
Despite the current oversupply, SoCal’s strong fundamentals suggest this is a temporary pause rather than a permanent downturn for the region’s industrial sector.
Notably, the Ports of Los Angeles and Long Beach both reported significantly higher YoY activity, which, coupled with a population increase in Southern California counties, underpins a continued demand for industrial space.
Josh Cox, SVP at Hillwood, emphasized that recent labor disputes on the East Coast have also positively impacted West Coast ports, enhancing their attractiveness for ongoing industrial activities.
Tenant Preferences
In the current tenant market, specific needs have become more pronounced. Many tenants are demanding additional trailer storage, higher ceilings, and smaller regional warehouses to improve local delivery times and supply chain efficiencies.
As an example, both Bob O’Neill from CapRock and Lexi Geiger noted that tenants prefer buildings with 40-foot clear heights and convenient access to transportation corridors and ports.
Future Outlook
While current leasing demand is softer, there are also signs of improvement, such as more inquiries and tours. Absorption rates and rents are also expected to stabilize by the end of 2024.
Over the long term, Southern California’s industrial market should still be poised for growth, driven by ongoing e-commerce and consumer demand for faster deliveries. Chase Watson from CT Realty and Lee & Associates’ Rinkov were both optimistic about the future absorption of high-quality, Class A industrial space coming online.
