Industrial Market Overview Report: Part Five

SKIP AHEAD TO

• Los Angeles–Orange County–Inland Empire Industrial Market
• Greater Los Angeles Transportation and Warehousing Employment Stable Year Over Year, but Up 15.1% From February 2020
• Los Angeles CSA’s NCREIF Vacancy Rate Up 150 Basis Points Year Over Year, Now Matching the Overall U.S. NCREIF Industrial Vacancy Rate
• LA-OC-Inland Empire Market’s Effective Rents Decline First and Most Among Major Markets
• Market Shift Evident Across Most Deal Fundamentals in LA–OC–Inland Empire
• The Top Ten Largest Renewals Inked Q2 2023 to Q1 2024 Commanded a 157% Increase in Rental Rate From Previous Lease in LA–OC–Inland Empire

CompStak conducted an in-depth analysis of market statistics across eight major U.S. markets, with a special emphasis on the Los Angeles-Orange County-Inland Empire region. Leveraging CompStak’s comprehensive data, we’ve identified a trend of moderation in the industrial leasing sector. Our upcoming blog series will delve into these insights, providing a detailed exploration of the industrial real estate landscape.

Interested in exploring the full report? Find it here.

Los Angeles–Orange County–Inland Empire Industrial Market

In this next segment, CompStak evaluated industrial market statistics for the Los Angeles–Orange County–Inland Empire market in more depth and uncovered the following major findings:

• Transportation and Warehousing employment in Greater Los Angeles peaked in December 2021, seven months before the U.S. peak, with a subsequent decline of 7.6% from the peak, compared to 1.7% nationally.
• Effective and starting rents for all transaction sizes have declined from their peaks reached in mid-2022. Year-over-year rent growth is now negative and substantially lower than in June 2022, when it was 53.1% for non-bulk deals, and in May 2022, when it was 70.7% for bulk deals.
• An increase in free rent and a drop in lease term length from the peak period was most pronounced among bulk transactions, where the free ratio of lease term has increased significantly by 190 points to 3.6% of term on average in the most recent period.
• Average annual lease escalations are one part of the deal that has reflected less change during this period of moderation—they rose steadily from mid-2021 before peaking in 2023, but now are down by just 11 basis points for transactions below 100,000 square feet and 10 basis points for bulk deals from peak.
• This market’s ten largest renewals from Q2 2023 to Q1 2024 were concentrated in logistics and distribution, and overall, still experienced a substantial increase in rental rate at renewal—across these top ten, the average weighted increase in rent topped 157% from the previous lease to their recent renewal.

Greater Los Angeles Transportation and Warehousing Employment Stable Year Over Year, but Up 15.1% From February 2020

Manufacturing employment in the Greater Los Angeles area declined sharply after the onset of COVID-19 and reached a post-GFC low in April 2020 but has increased 7.4% from that low, while remaining below the pre-COVID average. Conversely, employment in the transportation and warehouse sectors has generally been on the incline since the GFC and peaked in December 2021. Manufacturing employment has declined 1.8% year over year, while transportation and warehousing employment is flat from March 2023 (-0.3%).

Los Angeles CSA’s NCREIF Vacancy Rate Up 150 Basis Points Year Over Year, Now Matching the Overall U.S. NCREIF Industrial Vacancy Rate

In the NCREIF NPI at the end of 2022, the U.S. industrial vacancy rate reached its lowest level since the GFC, but has crept up to its highest level in two years.

Meanwhile, the Los Angeles Combined Statistical Area (CSA) vacancy rate reached its lowest level since the GFC in Q1 2022 but has also increased slightly since then, and is now tied with the national average of 2.5%, after increasing during six of the past eight quarters. In the first quarter of 2020, the overall U.S. vacancy rate for the NCREIF property index was 3.2%, about 160 basis points higher than the rate in the Los Angeles CSA.

LA-OC-Inland Empire Market’s Effective Rents Decline First and Most Among Major Markets

The Los Angeles–Orange County–Inland Empire market, regarded as the nation’s most robust industrial market in recent years, was the first major market to peak in rent growth. Now, it stands as the first to exhibit clear signs of steady effective rent decline, with the drop occurring regardless of transaction size. Year-over-year rent growth for bulk transactions of 100,000 square feet or larger peaked in May 2022 at +70.6% and averaged a 7.0% decline year over year across the Q1 monthly average—a drop of 776 basis points from peak to recent. Similarly, year-over-year rent growth for deals under 100,000 square feet peaked at 53.1% in June 2022 and most recently has averaged a decline of 13.3% year over year in the Q1 monthly average.

Market Shift Evident Across Most Deal Fundamentals in LA–OC–Inland Empire

The Los Angeles–Orange County–Inland Empire market emerged as a potential harbinger, reaching its peak in effective and starting rents well ahead of other markets. The zenith for effective rents in bulk and non-bulk transactions was observed in June 2023 and March 2023, respectively. This market has seen a significant effective rent drop across both bulk transactions and smaller deals from the peak period (Q3 2022 to Q2 2023) to the latest reset (Q3 2023 to Q1 2024). Effective rents for bulk transactions dropped by 8.3%, while smaller deals experienced a steeper decline of 9.1%.

Noteworthy shifts have unfolded within bulk transactions, characterized by a significant uptick in free rent periods and a subsequent reduction in lease length. This trend contributed to an increase of 190 basis points in the ratio of free months to lease length during the reset period. From an average of 1.6% during peak times, the free rent ratio surged to 3.6%. In the Inland Empire bulk market alone, this ratio soared more dramatically, rising from 1.4% to 4.2% in the most recent period. Bulk deals now average about five years in length, below both peak and pre-COVID-19 levels. This adjustment indicates that both landlords and tenants may see an advantage in committing to shorter terms as they seek greater flexibility in future market conditions.

While concessions play a significant role in the decline of effective rents, starting rents have also been impacted, albeit to a lesser extent. For the bulk market, the decline in starting rents from the peak is 4.8% as compared to the smaller transactions drop of 7.2%. This divergence highlights the different factors influencing effective rent, as the bulk market’s decline was more influenced by increased concession periods and reduced lease terms.

The Top Ten Largest Renewals Inked Q2 2023 to Q1 2024 Commanded a 157% Increase in Rental Rate From Previous Lease in LA–OC–Inland Empire

While rent growth is declining in the Los Angeles–Orange County–Inland Empire market, renewing tenants are still facing significant increases in rental rates, from their last rent paid in their current lease to the starting rent in their renewal in place. Across the top ten renewals by size completed in this market from Q2 2023 to Q1 2024 tracked by CompStak, the increase in rent ranged from 102.9% to 220.4%. The regional parcel carrier OnTrac signed two of the top ten industrial renewals in the Los Angeles–Orange County–Inland Empire market, including the number one ranked in the market, with an increase of 220.4% at the time of renewal.

Across all transactions, the average starting rent for renewals and extensions was 10.7% higher than the average over the same period for new deals and expansions only.

Want complete insights? Download the full report here.