Industrial Insights - August 2023
Executive Summary
The industrial real estate market shows bifurcated dynamics. Class B properties are accumulating inventory as tenants downsize, while Class A leasing cycles have decelerated. Interestingly, headline rates remain relatively stable—rather, concessions like free rent are absorbing downward pressure. This creates opportunities for tenants seeking shorter-term sublease deals while investors pursue mark-to-market strategies.
On the investment side, valuations heavily depend on weighted average lease terms (WALT), tenant loading, and development potential. The same submarket shows dramatic variance, with properties trading between $271–$758 per square foot during identical periods. Success requires rigorous underwriting and strategic business planning.
Lease Comps Summary
Recent transactions span $1.09–$1.85 NNN pricing across Southern California markets (Carson, Cerritos, Irvine, Cypress, Garden Grove, Fontana, Ontario, Rancho Cucamonga, Corona, Chino, Riverside, and Banning). Terms range from 24–137 months with 1–4 months free rent and 3–4.25% annual bumps.
Prologis Earnings Highlights
- NOI growth projected at 7.5% despite flat occupancy, driven by prior-year lease rate increases - Southern California remains strategically valuable but tenants show heightened price sensitivity - Customer retention declined to 70.5%—the company notes "there is a fine line between pushing rents and losing tenants" - 3PLs increasingly right-size space, leveraging mark-to-market subleases
Rexford Earnings Highlights
Concessions rose from $1.25 to $1.65 PSF this quarter. The portfolio maintains embedded 4% annual increases with 31% NOI upside. Bad debt stands at 35 basis points (up from 25 bp), though only seven of 1,600 tenants are on credit watch.
A key distinction: upgraded warehouses command rent premiums while older properties struggle. Rexford captures positive net absorption despite broader market softness due to superior asset quality.
CoStar Market Analysis
Imports to Southern California fell 21% year-over-year, reflecting post-pandemic shifts toward services and reduced retailer inventory. Los Angeles lost nearly 14 million square feet of industrial occupancy—approximately 2% of inventory. The Inland Empire reversed from 33 million square feet of net absorption (2021 peak) to negative absorption. Orange County maintains low vacancy despite minor declines.
A tentative six-year dockworker agreement supports future import stability.
Media & Resources
Two books available: Industrial Intelligence (audiobook and print) and Industrial Income (publishing January 2024, beta readers sought). A podcast series explores market topics.