October 23, 2018 Maria Verdin

Q3 Industrial Highlight: Tight Labor, Tight Supply, High Demand

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AIR CRE’s Q2 2018 industrial report pointed to tight supply and increased demand. As we roll into the final months of 2018, reports for Q3 show that things haven’t changed all that much, quarter over quarter. However, research analysts note that some shifts to Southern California’s industrial sector could be on the way. Issues ranging from tightening labor markets, to potential fallout from tariff wars, to limited land for additional development could have an impact on the industrial market, and need to be watched.

In this report, we’ll focus on metrics from Greater Los Angeles, Orange County and San Diego.

Los Angeles: E-Commerce, Tight Supply, Historically Low Vacancies

The Los Angeles industrial reports issued for the third quarter told the same story: Historically low vacancy rates, due to “strong demand from e-commerce and third-party logistics companies,” according to CBRE. Cushman & Wakefield went on to say that the vacancy rates throughout Greater L.A. were the lowest among major industrial markets in the United States.  The hunger for warehouses and distribution is leading to lease rates rising so quickly that “we are seeing a growing trend of active listings without an advertised rate,” Voit researchers said.

Orange County: Continued Demand for Logistics Space

 

Orange County

Source

Inventory

(Square Feet)

Vacancy Under Construction

(Square Feet)

Asking Rent

CBRE

256,485,120

1.5% 1,267,384

$0.92

Cushman & Wakefield

293,843,779 1.7% 1,452,341

$0.89

Voit

230,471,683

2.2% 1,267,384

$0.89

 

Much like what is taking place in Los Angeles, Orange County is also experiencing tight supply and huge demand, mainly in the logistics and warehouse space. This has led to historically low vacancy rates, one of the lowest in the country, Voit researchers note. “Landlords will continue to have leverage in this competitive market, resulting in higher rates and fewer concessions,” they went on to say.

Cushman & Wakefield indicated that renewal activity accounted for a large part of Q3 transactions, while both Cushman & Wakefield and CBRE indicated that new deliveries for smaller product can be expected in late 2018 and early 2019.

Voit is forecasting “continued positive absorption and virtually no new supply.” CBRE analysts agreed, noting that much of the available land and obsolete industrial facilities are going to residential and creative office space developers, respectively. This will mean continued pressure on vacancies and increase in rents.

 

San Diego

Source

Inventory

(Square Feet)

Vacancy Under Construction

(Square Feet)

Asking Rent

CBRE

193,056,241 3.9% 2,675,989 SF

$0.94

Cushman & Wakefield

164,059,934

4.8% 2,296,046 SF

$0.99

Voit

143,249,514

3.6% 2,341,197

$0.98

 

San Diego: Growing Manufacturing Mecca, Tighter Space

According to Kelly Cunningham, with the San Diego Institute for Economic Research, one of the more interesting aspects of the San Diego economy is the growth of the manufacturing industry. This matches with the Cushman & Wakefield Q3 report, which pointed out that availability of manufacturing space is tight, with landlords offering few concessions in the face of increased demand and few move-outs.

Another interesting industrial real estate trend in this border city has been space deliveries — much of it already spoken for. CBRE researchers indicated that more than 1.3 million square feet was added to the inventory in Q3, with “more than three-quarters of that space pre-leased.” The Voit report focused on near-record highs when it comes to overall occupancy and rental rates, with the average small business owner facing sticker shock when it comes to new leases or lease renewals.

The SoCal Outlook

While industrial trends appear to remain positive throughout Southern California, things could be at a tipping point. CBRE analysts point to a tightening labor market that “test the limits of future job growth, and could pose a concern for some industrial users.” In addition, Cushman & Wakefield said that an increase in available sublease space (specifically, in San Diego) has “traditionally been a precursor to market corrections and tenants adjust their footprint.”

Then, there is the potential impact of the trade wars with China, and the possible effect on industrial product. Still, Cushman & Wakefield analysts aren’t concerned, pointing out that consumer spending and retail sales will likely remain strong, at least, for the near term. “It would take a major shock to derail the U.S. expansion,” they added.