“Is the industrial market going down yet?” Not exactly

People are always asking me if what we see in industrial mirrors what we see in residential with the rise in interest rates. They ask if pricing is going down yet. There are sale transactions that are blowing up, being re-traded, repriced, and there is the “price discovery” process where everyone is feeling out what prices should be. If that is all we were seeing then it would be easy to say, yes, the market is softening and has to go down.

The rub is that lease rates are still going up. Increasing lease rates mean that the underlying property is becoming more valuable. So if you are the all-cash investor, you are in the best position where you are unaffected by the increase in interest rates, you can then push for lower acquisition prices, and then still benefit by increasing lease rates. For all of us mortals who rely on debt financing to acquire properties, then you are facing 50% LTV loans as your new reality.

For tenants, business owners who lease warehouses to operate their businesses, there is little to no relief. Lease rates are going up at a lower clip, but they continue to go up. There are undoubtedly more sublease availabilities, and more space is available in the smaller size ranges. This is making it easier for small and medium-sized businesses to find space, but only by a smidge. Take the average 50,000 SF user, you used to be competing for one building in Q1 and Q2. In Q3, you might find a building and be the only one offering on it for a small window of opportunity, or god forbid two buildings might work for you. But even then, not for long. This is welcome and closer to equilibrium.

Here is what you need to know about each industrial market:

Orange County

• Summary
  • Four straight quarters of available inventory becoming more scarce
  • Samsung signed 1 million at +/-$2.00 NNN
• Absorption
  • 1,043,000 SF YTD
• Vacancy
  • 1.3%, unchanged from last quarter
  • 18 of the cities in OC have sub 1.0% vacancy rates
• New Construction
  • 3,963,000 SF in the pipeline, new high
  • 69% preleased
• Lease Rates
  • 34% increase YTD
  • 4.0-4.5% annual increases

Los Angeles

• Summary
  • $2.00 NNN rents on Class A is normal now, and $2.59 NNN the new high water mark in South Bay
• Absorption
  • 2,694,000 SF YTD
• Vacancy
  • 0.8%
• New Construction
  • 5,188,000 SF in the pipeline
• Lease Rates
  • Rates increased 6.7% this quarter, 23.6% increase YTD
  • 13% rate delta between LA and IE
  • 4.0-5.0% annual increases

Inland Empire

• Summary
  • $2.20 NNN rent new high water mark
  • 1 million SF transactions moved the market. 4 signed this quarter, and 8 signed this year
  • Absorption paused during summer, but rate increases did not
• Absorption
  • 11,096,000 SF YTD
• Vacancy
  • 0.6%
• New Construction
  • 39 million SF in the pipeline
  • 48% pre-leased
  • 3.4 million SF delivering this quarter
  • Deliveries matching absorption now
• Lease Rates
  • The rate increased 20% this quarter
  • 17% rate delta between IEW and IEE
  • 4.0-5.0% annual increases

Newest Listing

Here we have a 35,000-45,000 SF sublease listing in the heart of Orange County. This is for a client who is opening a new location and has excess space as a result. This can work great as a short-term sublease of warehouse space, all the way up to a long-term direct deal with the landlord for the entire building.

Let us know if you would like more information or would like to schedule a tour.

Market Reports

• Los Angeles County (Market Report)
• Orange County (Market Report)
• Inland Empire (Market Report)
• San Diego (Market Report)
• United States Market (Market Report)
• Las Vegas, Phoenix, Dallas, Atlanta, and any other markets you need upon request.

Media

• Book #1
  • Industrial Intelligence, The Executive’s Guide for Making Informed Commercial Real Estate Decisions
    • Audible / Audiobook Now Available!
    • Buy Paperback & Kindle
    • Amazon Review
      • If you have enjoyed the book, I would be most grateful if you can leave a review on Amazon. You can find the link to do so here.
• Book #2
  • Industrial Income: The Landlord’s Guide to Making Value of Commercial Real Estate
    • I’ve halfway through the “make it right” edit of the manuscript and continue to interview top asset managers, acquisitions officers, chief investment officers, CEOs, construction managers, and more. I’m excited to finish editing by year-end and bring to you the best book on industrial leasing in Q1 2023.
• Podcast
  • Jason Miller, head of Michigan State University’s Supply Chain & Logistics program, was filmed yesterday and will be out next week. We talked about how looking at durable good production, new home construction (not starts), and Less than Truckload (LTL) tonnage are some of the lesser used metrics to follow to keep a better on the pulse of the economy and as it relates to industrial real estate. We belabored the labor shortage issue, parsed the need to rethink consumer demand vs supply when thinking about economic policy, and then covered steel and what steel production means for us and our buildings and the larger economy in 2022 & 2023.
  • Colin Dubel, managing director of HarborWest Capital. Here we talked about what to do if you have a loan due in the next year, the use of bridge loans, and cross-collaterization.
  • Subscribe to the show or listen to individual episodes here

We’d love to catch up with you and brainstorm how we can make your goals come to life. You can book time with me at your convenience: https://calendly.com/industrialsmith/. Thank you!

Best Regards,

Justin Smith, SIOR              Grant LaBounty
jbsmith@leeirvine.com         glabounty@leeirvine.com

Chris Vassilian                     Jeannette Cano
cvassilian@leeirvine.com     jcano@leeirvine.com