Week of June 25 – Need For Space

The industrial market during the Covid-19 period, now edging back to normality, is a lesson on disruption. The most visible example are container ships backed into the sea and unable to unload goods because there is not enough dock space available at the ports. It is the same at warehouses and container yards: too many products and not enough space.

The result is rent surges and whispers for space. Tenants are paying above asking rates and taking longer leases than they would normally like. With competitive offers, credit is the deciding factor. Landlords benefit by keeping their buildings full, at top rents, with excellent tenants. Companies that secured space in anticipation of supply chain disruptions and created resiliency are now in the enviable position of having room for growth and can sublease to others. The market has shifted from “a search for yield” to “a need for space”. One broker friend put it, “No one is objecting to the rent, they just want the space.”

If extreme space constraints, by itself, were not enough of a market propellant, it was already a hot market for investors. Not only do we have the lowest interest rates of a lifetime, operating in negative territory for long stretches. There has been a massive generational change by the largest institutional funds to shift assets to alternative investments like real estate. Prime examples are high end investment funds competing against owner/users for old warehouses in industrial areas. Los Angeles is home to the dynamic combination of plentiful liquidity, intense space scarcities and surging industrial activity. The result is strong wealth creation by families and professional investors.

While leaving California is popular with some, most companies cannot disengage from Southern California without impairing their business. They will lose access to a vast consumer market, the gateway port complex, diverse labor, industrial transport and infrastructure. Until the cycle changes, tenants are forced to scramble and “pay up” for space.

(This is our final Commentary and we’ll return to publishing out insights in blog format.)