As we wrapped up the first quarter of 2024, the industrial scene in Greater Los Angeles presented some intriguing figures. The vacancy rate stood at a low 2.7%, indicating a tight market. However, there was a noticeable shift in occupancy, with net absorption hitting a negative 3.8 million square feet. This suggests that more industrial space was vacated than leased during this period. In terms of costs, the average direct asking rate hovered around $1.52 per square foot on a monthly triple net (NNN) lease basis.

MARKET HIGHLIGHTS

• The first quarter of 2024 brought some interesting changes to the industrial market of Greater Los Angeles. We saw the vacancy rate inch up to 2.7%, a rise that seems to have been propelled by a significant 3.8 million square feet of space left unoccupied, more than what was taken up.
• The availability rate also ticked up, reaching 4.9% from the previous quarter’s 4.2%. It appears that there’s a bit more elbow room in the market compared to the end of last year.
• In terms of pricing, the average direct asking rate took a slight dip by just a penny, settling at $1.52 on a triple net (NNN) lease basis. This marks a 7.8% decrease from its peak back in the third quarter of 2022, hinting at a softer demand or perhaps more competitive pricing.
• Despite these shifts, the total leasing activity remained robust, nearly hitting 7.5 million square feet, thanks in part to some substantial lease renewals.
• Focusing on the types of businesses taking up space, distribution and third-party logistics (3PL) occupiers were prominent among the top five leases, with two brand new deals being struck.
• On the sales front, Rexford Industrial Realty made a splash by acquiring over 2.4 million square feet of industrial property in L.A. County, shelling out upwards of $808 million.
• And it wasn’t just Rexford making moves; there were ninety-six sales transactions for properties over 10,000 square feet, totaling an impressive 4.7 million square feet or $1.5 billion in sales. It’s clear that the industrial property market is still a hotbed of activity.

FIGURE 1: Vacancy & Net Absorption Trend

MARKET OVERVIEW

As the first quarter of 2024 unfolded, the industrial submarkets within Greater Los Angeles (GLA) faced their fair share of challenges. A notable rise in both vacancy and availability marked the period, leading to a more cautious and price-conscious tenant base. Deals were deliberated over longer periods as tenants sought the best value for their money.

Landlords, in response to this heightened sensitivity to pricing, found themselves adjusting rates downward in certain areas and crafting attractive concession packages to remain competitive. The average asking lease rate across GLA reflected this trend, dipping slightly to $1.52 per square foot on a triple net (NNN) basis, a modest decrease from the previous quarter.

The South Bay and San Gabriel Valley regions felt the most significant impact, with lease rates falling by $0.06. Conversely, the Mid Counties area bucked the trend, seeing an increase of $0.06, while the Greater San Fernando Valley held steady with a slight increase of $0.02.

Activity levels, however, told a different story. Gross activity surged to 7.5 million square feet, a 10.2% jump from the last quarter. This uptick was largely fueled by a series of large renewals within the South Bay market, particularly in the 100K to 500K square foot range. The South Bay led the charge in gross activity, followed by Central Los Angeles and the San Gabriel Valley.

Despite this flurry of renewals, net absorption across GLA took a hit, plunging to a negative 3.8 million square feet. Ventura County stood out as the sole submarket to post positive figures.

The quarter also saw a shift in the overall vacancy and availability rates, with vacancy climbing from 2.1% to 2.7%, and availability rising from 4.2% to 4.9%. This added an extra 5.9 million and 7.1 million square feet to the market, respectively.

Sales volumes experienced a rebound in Q1 2024, following a slowdown in the latter half of the previous year. This resurgence was spearheaded by Rexford Industrial Realty’s notable acquisition of Blackstone’s portfolio. Institutional buyers led the acquisitions, with private buyers and owner-users following suit.

Construction activity remained robust, with 7.3 million square feet of industrial properties under development. Of these, 820K square feet were completed in Q1, with the San Gabriel Valley leading in deliveries, including the notable 261K square foot warehouse at 905 Live Oak, Building 2, in Irwindale.

FIGURE 2: Submarket Statistics

SUBMARKET MAP

Definitions

When we talk about Available Square Feet, we’re referring to spaces within buildings that are ready and waiting for someone to move in. These could be currently occupied or sitting empty, just waiting for the right tenant. The Availability Rate is a quick math check – it’s the total of these available spaces divided by the entire floor area of the building.

Now, if you’re curious about the going rate for these spaces, that’s where the Average Asking Lease Rate comes in. It’s a number crunched from both net and gross lease rates, with each rate weighted according to how much space it applies to.

Speaking of space, the Building Area is the total size of the building measured from its outermost edges – think of it as the building’s footprint.

Then there’s Gross Absorption, which is all about tracking the movement in the market – every sale and lease that’s been signed and sealed within a certain timeframe. However, it’s worth noting that this doesn’t include renewals unless they were up for grabs to the public, nor does it count investment sales.

Gross Activity is similar; it’s the sum total of all the sales and leases over a specific period. The Gross Lease Rate is the rent that typically covers your basics like taxes, insurance, and major upkeep.

Net Absorption gives us the lowdown on how much occupied space has changed from one period to the next. It’s a positive sign when leases are signed, even if the new occupants haven’t moved in yet. The Net Lease Rate is a bit different from the gross rate as it doesn’t include certain costs like taxes, insurance, and major maintenance.

Occupied Square Feet is pretty straightforward – it’s the part of the building that’s not empty. And the Vacancy Rate? That’s the percentage of the building that’s looking for occupants, calculated by dividing the total vacant space by the building’s total area.

Survey Criteria

our Survey Criteria zooms in on industrial buildings in Los Angeles and Ventura counties that are at least 10,000 square feet in size. It includes those buildings that have shown signs of construction, like a dug-up site or the beginnings of a foundation.

MARKET HIGHLIGHTS

• The second quarter brought some notable shifts in the market. We witnessed a dip in net absorption, primarily due to a significant retailer closing its doors for good and a key player in the apparel sector vacating a pair of buildings in Los Angeles. This apparel giant is now eyeing the possibility of merging their operations into an existing space over in the Inland Empire West.
• As more direct space re-enters the market, we’re seeing an uptick in both vacancy and availability. This influx is starting to weigh on asking rents, nudging them downwards and, in turn, leading to a remarkable increase in the average duration of free rent being offered.
• The San Gabriel Valley is buzzing with activity, particularly from owner-users who are expanding their presence. Meanwhile, the San Fernando Valley is not far behind with its bustling development scene. A noteworthy addition is the new 1 million square foot space in Palmdale earmarked for Trader Joe’s. And as we look at the year-over-year growth in import volumes, it seems like we’re on the cusp of a surge in fresh tenant demand.

A CLOSER LOOK AT THE Q2 MARKET DYNAMICS

The Los Angeles industrial market experienced a bit of a shake-up in the second quarter. A total of 2.4 million square feet of space was left unoccupied, and nearly half of that was due to just two tenants. The closure of 99 Cents Only Stores resulted in a significant 615,000 square feet of empty space in Central LA, which accounted for about half of the negative absorption in that submarket. Meanwhile, VF Industries, a major name in apparel, decided against renewing their leases for two Mid-Counties locations, which added up to 537,000 square feet. However, they still have a substantial 1.2 million square foot lease in Ontario, which could be a strategic move for consolidation.

On the brighter side, the logistics, consumer products, and health-related industries have been absorbing space positively in the South Bay, San Gabriel Valley, and Mid-Counties areas.

Despite some positive leasing activity, the overall negative net absorption has nudged the market vacancy rate upwards, now standing 460 basis points above the historic low we saw in the first quarter of 2022. While 70% of the new completions were pre-leased in the second quarter, the introduction of 4 million square feet of new space by the end of the year, coupled with fluctuating tenant demand, is raising some eyebrows.

Interestingly, the addition of new sublease space paused during this quarter. Yet, the growing availability continues to exert downward pressure on asking rents, which are now 13% lower than their peak in the third quarter of 2022. This has led to an unprecedented increase in the average duration of free rent offered, quadrupling in just two years.

Large block leasing, which includes spaces over 100,000 square feet, has been a silver lining, with 28 leases signed in the second quarter, following 11 in the first. Logistics companies are leading the charge in this segment, particularly in the South Bay area, which accounts for 40% of the quarter’s leasing volume – a testament to the area’s strong ties to the bustling ports.

LOOKING AHEAD

The San Gabriel Valley is buzzing with activity, with five projects totaling 800,000 square feet expected to be completed by the first quarter of 2025. The San Fernando Valley is also witnessing growth, with four speculative projects and a massive 1 million square foot build-to-suit for Trader Joe’s breaking ground in Palmdale.

Investors and developers have their sights set on the potential of Antelope Valley, but the LA Basin remains a key player. With year-to-date import volumes at the ports climbing by 17% compared to last year, there’s a hint that the consistent flow of goods might be translating into fresh demand for tenant space.