Los Angeles Industrial Rent Growth Cooling After Years of Gains
The Los Angeles industrial market finally showed some signs of cooling in 2019 after a dynamic stretch of growth.
Overall net absorption, the difference between move-ins and move-outs, was negative last year, and industrial vacancies rose for the first time since the recession. However, the vacancy rate was at an all-time low of near 2% at the start of 2019, and vacancies remain around 3% today, which is the lowest rate of any major industrial hub in the country.
These tight conditions are largely a result of supply constraints. Industrial construction is minimal given the size of the region, where total industrial square footage actually declined this cycle as aging industrial assets were demolished or converted at a faster pace than new supply could be built.
Despite low overall vacancies, rent growth decelerated sharply in 2019. Prior to 2019, industrial rents had posted annual growth above 7% for five straight years. Year-over-year gains fell to just 3% in 2019.
Last year’s relatively minor vacancy expansion probably isn’t sufficient to explain such a significant slowdown in rent growth. Affordability pressures are a more likely culprit. Explosive growth earlier this cycle pushed market rents more than 50% higher than their pre-recession peak, to around $1.10 per square foot monthly. That type of growth is not sustainable over a long period of time, and the weaker growth in 2019 may indicate rents have been pushed about as high as the tenant base can bear.
These softening fundamentals don’t appear to be deterring investors. More than $6 billion in industrial trades were recorded in Los Angeles County last year, the most of any U.S. market and an all-time high for the region. Major national investment firms like Blackstone Group and Rexford Industrial Trust are making big bets on area industrial assets, with both companies investing more than $1.4 billion in the area over the past five years.
Full article from Costar
By Steve Basham CoStar Analytics