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.