Industrial Insights for OC / LA / Prologis

Market Insights

Good afternoon. I spent the morning reading through every Q1 2020 industrial market report from every firm and then listened to the Prologis quarterly call. Prologis is in the market more than anyone in the United States, so what they see, is what we will experience. Here are my notes below:

Orange County Industrial Market

Modest downward pressure in OC with few new Class A buildings coming to market. Expect additional sublease space coming to market coming off of a quarter of positive absorption. Rents expected to be flat or modestly down.

  • Historical Perspective on the last recession from 2007-2009
    • 161,850 Orange County workers or 10.7% of the labor force unemployed
    • Orange County’s industrial market entered the 19-month downturn with a 4.1% vacancy rate at the end of 2007.
    • Although the recession ended in June 2009, the vacancy rate peaked at 7.5% in Q1 2010.
    • The amount of empty space nearly doubled from 11.3 million SF to 20.9 million SF, and average asking rents skidded 26%.
    • During the recovery the vacancy rate didn’t fall below 4.1% again until Q3 2014.
    • Rents did not recover until Q1 2016 and asking lease rates have increased about 30% since.
  • 501,528 SF positive absorption 1Q2020,
    • North Orange County the main driver posting 846,491 SF of positive net absorption
      • Total Transportation represents 309,000 SF lease in Fullerton
      • 1,000,000 SF lease signed by UNIS in Buena Park
    • Airport and South County experiences negative net absorption
      • Rivian Automotive signed 270,000 SF in Irvine Spectrum
    • West County posts 383,599 negative absorption
      • Includes Home & Body 167,778 SF lease
  • Average lease rate $1.00 PSF NNN which is 8.7% over last year
    • Rents were projected to increase 3.5%, now projected to be flat
  • Vacancy increases modestly expected

 

Los Angeles Industrial Market

Moderate downward pressure in rents in Class A industrial rents with new buildings coming to market. Expect additional sublease space coming to market with negative net absorption equaling. Rents estimated to be flat for modestly down.

  • Highest total negative absorption since 2008
  • LA County Moratorium on commercial evictions in place for 60 days
  • Continued heightening of lease rates to record high $0.94 NNN
  • Tentative rent growth projected for 3.3%
  • Vacancy rate increased but only slightly to 1.7%
    • South Bay 0.8% vacancy rate
  • 12 of 14 new buildings developed still vacant when completed
  • Combined net absorption negative 1,707,615 SF
    • Los Angeles largest negative absorption since 2008
    • South Bay 662.288 positive absorption. The only major area that posted positive absorption
    • Mid Counties modest net negative absorption

 

Prologis Earnings Call Notes

Here are my notes from this morning’s Prologis earnings call:

  • 20-25% of customers asked for rental relief.
    • Rent reliefs declined to 70% of requests, they are still reviewing 23%, they granted 7% and those that were granted averaged 33 days of relief, were structured as loans, and were to be paid back during the 2020 year.
  • Their forecast internal belt-tightening and slowing speculative development.
  • As for their overall portfolio, they have allowances for modest additional total vacancy but tempered the softness with the thought that companies will hold more inventory locally and that e-commerce acceleration that will help add absorption to balance out the market.
  • Houston seemed like the toughest market for them with the added oil market exposure and for Atlanta being a bit soft as they have a lot of smaller customers in that market.
  • To soon to tell how CARES ACT and PPP will help small businesses. Many of the small business demand is deferred demand. Banks better capitalized this time around.
    • Large amount of their customers applied for and received funding that should bridge them until better times.
  • Market rent growth in January and February 1% than projected, March was 2% higher than projected, no evidence of rental decline or deceleration thus far but preparing for rental growth softening.
  • 4-5% higher rents for Liberty Property Trust is achieved than what was previously underwritten.
  • March and April collections trending normally.
  • 30 built to suits continue.
  • Where is their confidence coming from? Prologis estimates rents won’t go up anymore this year. Flat rent growth this year is their best estimate. 2021 rent growth to continue.

Earning call link: https://ir.prologis.com/events-and-presentations/event-details/2020/Q1-2020-FINANCIAL-RESULTS-WEBCAST-AND-CONFERENCE-CALL/default.aspx.

What are you seeing out there? Please share your perspective so we can better communicate with each other and find better solutions to overcome challenges. Happy to help.

Justin

Justin Smith, SIOR
MBA, MRED, MCR
Senior Vice President | Principal
Lee & Associates | Irvine

D  949.790.3151
C  949.400.4786
O  949.727.1200
jbsmith@lee-associates.com


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