2014 ended on a strong note at year end. All my listings are either leased or sold and it confirms the space shortage that is looming throughout Los Angeles. Tenants should be looking six months prior to lease expiration and be prepared to pay double rent as soon as they find a space they like. Not only has there been very limited new construction over the past several years, but high sale prices have taken a lot of buildings off the lease market. This has put upward pressure on lease rates for functional distribution type warehouses. Most new developments are exceeding their proformas with deals being struck during construction, especially on the sale side. The predominance of cash buyers, both from foreign investors and funds is dramatic even as the march of higher prices and lower yields continue.
Chinese investment in Los Angeles in nothing new, but the breakout trend is away from traditional areas in the San Gabriel Valley. The overriding purpose is to buy anything that looks reasonable and has a modest return. Because of the cultural and language barrier the Chinese investor arrives with a translator, real estate expert, and often family. They are all business when it comes to closing sometimes wiring in the funds even before contingencies are lifted. Los Angeles is a favored destination for this type of foreign investment because of the Pacific location, the strong Chinese Community, vast trading opportunities and the federal visa programs. I predict you will see more Chinese investment across the United States as opportunities in Los Angeles diminish.
There is a strong divergence between functional and non-functional buildings. Buildings with decent loading and ceiling heights are renting at new highs. Buildings that are obsolete have seen minimal rent increases over the past several years. However this is not true on the purchase side. Sale prices for older, non-functional building are also increasing as buyers will spend money on improvements where they won’t on a lease. Owners of older buildings don’t want to invest in improvements because the rent growth isn’t there. And they don’t want to sell because of tax consequence.
The pace of the Los Angeles industrial market is a strong contrast to the global economy and other international flash points. In addition, serious, local economic issues have not deterred investment. This past year we lost several major employers including Toyota, Tesla and Occidental Petroleum to other states. Labor slowdowns in the port have long term consequences because of shipper’s forward planning. Current delays are unconscionable threatening permanent economic damage. The drought is taking a large toll on local farmers and will require massive investment in water supply that, in many cases, outweighs the value of the crops. Recent rains so far this winter have not significantly helped. Even with the S&P 500 up almost 90% over the past 5 years, the California pension system is vastly underfunded causing local municipalities to steer tax dollars away from basic services to make up the funding deficit. I could list other financial strains in California but it doesn’t change the picture. Industrial real estate prices keep chugging along quite comfortably. Supply constraints, lots of buyers, recovering industry, lower oil prices and rock bottom interest rates are providing momentum for the L.A. industrial market.