Week of March 4, 2021
Three things I see since the start of the year:
Many institutional investors are hard at work buying properties that would normally be considered sub-investment grade. They are buying older, smaller and obsolete buildings that were the domain of owner/users, who are now being outmaneuvered by full time real estate investment firms. Lots of targeted capital partners are also coming in. The same types you see after a recession with sophisticated offerings of preferred debt, waterfalls, and different tranches of equity. Development partners raise a small slice of equity that will become the most profitable if the project succeeds, but will also be wiped out if the project fails. The immense amount of money is a mixed blessing. From a broker’s perspective new cash coming into the market is a positive development. At the same time, investors are taking away opportunities from owner/users, my traditional clients who rely on me the most.
On the tenant side, it’s a race to secure vital space at key nodes on the supply chain network. In Los Angeles, it means warehouses for both local and international distribution. Most markets don’t have this double purpose for warehouses and it makes Los Angeles special. Container yards, too, have become important with supply disruptions and space scarcity at the port. The notable shortage of certain goods and component parts has talented logistics company paying up to make their networks more efficient by acquiring space at the right locations.
Finally, lots of deals were put on hold (and still are) because of Covid. But a big thaw is on the way. Many properties I could not sell last year are now in escrow as of the start of the year. I thank my customers for sticking with me through these times. More importantly, space shortages will become more pronounced and if you have plans to expand, don’t wait too long. Los Angeles industrial is and will continue to be a hot part of the market as the economy fully re-opens. There will be higher rents and operating costs to come.
Week of February 1, 2021
For data tracking we use space on the market instead of actual vacant space. It is easier to track but the results skew higher than other vacancy stats that are published. The data by itself can be misleading. For 100,000 SF and greater, the only two buildings “available” are in early stages of construction. You could easily say there is zero vacancy in that size range. Big buildings are new to this market but as a sign of positive demand, they are mostly pre-leased before the end of construction.
Weaker, is the typical Gardena building of 25,000 SF to 50,000 SF. This range is more representative of the area and is showing softness. 15 buildings on the market out of 117. You could say it’s a reflection of sickness in the economy. Many of these buildings are older and not fit for ecommerce. The large numbers in this range show opportunity and once the economy rebounds later this year, the vacancy numbers will shrink. Best buys are in this range.
The 25K to 50K range lacks much institutional ownership. Private buyers can still find a deal. Expect sale prices at $200 per foot and rents at $11 Annual NNN. While buildings are older, they are generally functional and in good locations. The market is 5.5% cap rates with good appreciation. Local credit tenancies with track records for 5 year terms. Build in 3 to 6 month vacancies and refurbishment costs. These mid market buildings in the Los Angeles industrial core are solid investments.
On a personal level, anything for sale has strong interest, no matter the age or class. Investment funds and SBA-backed are the dominant purchasers. Leasing is more moderate for the typical Gardena building. The exception is new, distribution buildings which are the focus of corporate users. I would characterize the market as robust with good activity. There are soft spots, generally in older buildings where owners do not want to sell.