Industrial Insights - September 2023
Executive Summary
The market is in a prime deal-making window between summer and holidays. Pricing is softening with increased free rent and abundant subleases. Lease rates may be declining soon. Many tenants and business owners are navigating transitions involving upsizing, downsizing, lease terminations, consolidations, and relocations.
Tenants - Time of Transition, Hard Decisions
Downsizing vs. Subleasing vs. Termination
Companies facing renewal situations with slow business must weigh options: maintaining larger spaces with higher rate increases versus downsizing with relocation costs and concessions. Staying offers growth potential and sublease possibilities, while moving provides landlord incentives but requires operational disruption and capital investment.
For mid-lease transitions, strategic subleasing can attract new 5-10 year tenants, enabling landlord termination negotiations without direct lease break complications.
Moving Out of State
The firm handles 5-10 out-of-state assignments annually. Southern California companies frequently consider Las Vegas, Phoenix, and the Central Valley. Successful relocation requires three analytical components:
- Network Optimization Studies: Freight consultants evaluate inbound/outbound logistics to minimize transit time and reach customers faster. - Labor Analysis: Comparing wage rates, skill availability, educational attainment, union status, and workforce housing affordability across markets. - Economic Incentives: Securing state, county, and city incentives requires strategic timing and ongoing performance monitoring.
Nearshoring
Companies explore Mexican operations as alternatives to California or Asian manufacturing. This requires understanding distinct legal frameworks and engaging regional SIORs and economic development consultants.
Landlords - Class A Cools, Flight to Class B
Net Absorption Trends
Los Angeles experienced negative absorption for four consecutive quarters. Orange County shows negative year-to-date absorption. The Inland Empire recorded its first negative quarter in 14 years, though remains positive annually.
Rent Growth
- Los Angeles: 16.2% YTD increase; rents peaked and expected to decline - Orange County: 9.9% increase; slight softening projected - Inland Empire: 7.9% increase; decline expected amid peak construction deliveries
Sublease Inventory
The Inland Empire surpasses combined Los Angeles and Orange County sublease space at a 13-year high of 6.7 million square feet, though still below 2009-2011 levels.
Sale Comps
Recent transactions show continued activity despite bid-ask spreads. Owner-user purchases and SBA loans continue. Properties range from $4.48 million to $44 million, with per-square-foot pricing from $147.29 to $614.68.
Media
Two books are available or forthcoming: - Industrial Intelligence (audiobook and print formats available) - Industrial Income (publication targeted for January 1, 2024)
A podcast is available for subscription.