Demand for warehouse space is likely to remain strong as Europe moves out of recession and growth in China stabilizes. Demand for industrial property has been particularly strong in Los Angeles and Orange County because of the large amount of exporting that occurs there.
The supply of industrial real estate is very tight with a vacancy rate of only 3.6% across Los Angeles County. The supply has grown even tighter over the last quarter with the availability of industrial space dropping by 20 basis points during the second quarter. Construction in the industrial is relatively robust with over 3 million square feet of industrial space currently under construction. The majority of this construction is for build-to-suits which means that it will not affect the current vacancy rates. It is expected that due to demand outweighing supply that the construction of industrial real estate will continue at its current rate.
The port system in Southern California is one of the busiest in the world and the largest in the United States. As cargo volumes increase it is a good indication that demand for industrial space will also rise. For 2012 container volumes were flat due in large part to an 8 day strike which closed the ports for this period. The expectation for 2013 is that container volumes will begin to increase in line with the improvement of the overall economy.
Ongoing tenant renewals are keeping the amount of available industrial space limited. To give an indication of how the supply of industrial space is shrinking in 2009 there were 30 blocks of industrial space of 100,000 square feet or more available. By the end of 2012 this figure had shrunk to eight blocks. This allows landlords to command above market rents and is also an indication that more development may ensue.
Many Los Angeles distributors are willing to pay the premium for buildings with good clearance heights and high doors for trucks. There is also strong demand for building which feature yards large enough to house trailer parking. Given the lack of quality space on the market we can expect to see more construction to service logistics companies in this market.
Many brick and mortar stores are deciding to add fulfillment centers to supplement their existing warehouses for their stores. This should have a significant impact on the industrial property market in Los Angeles going forward. The 2013 Jones Lang LaSelle Industrial Property Outlook report suggests that by the end of 2013 there will be 20 million square feet required by industrial tenants. This is far greater than the current 9.6 million feet that is under construction. This should help to support rent rises in the industrial market.