For industrial spaces 25,000 square feet and greater, there are 150 available locations. Of these 40 are subleases with an average term of 36 months. Rents are declining and property taxes are a substantial differentiator when comparing “total” rent.
More buildings are being offered for sale because of slack tenant demand. Many of these buildings would have been swept up by Private Equity but high interest rates and stricter debt standards have put them on the sideline. More property owners are “testing” the sale market and we expect price reductions to continue.
The best value for most tenants, 100,000 square feet and greater, is second and third generation spaces. Buildings built since the year 2000 are highly functional with the same characteristics as brand-new buildings except for ceiling heights, although many of these 2nd Gen buildings still go to 30’. The market is tighter in the smaller sizes because very little product has been developed at less than 50,000 square feet.
When tenants want to expand their search, we often move South Bay tenants to Santa Fe Springs/Mid Counties or to Inland Empire West. Popular destinations when tenants decide to “Pick up and Go” include Phoenix, Texas, and the Carolinas.
In less than 18 months, the industrial building market has shifted from low vacancy to abundancy. There are now 215 industrial spaces, greater than 50,000 square feet, available in the Greater Los Angeles Basin. This does not include Orange County, Inland Empire, or San Fernando Valley. Only the areas you see on the map (below). About 20% is sublease space.
The best value for most tenants is second and third generation spaces. Many of these buildings built since the year 2000 have the same characteristics as brand-new buildings except for ceiling heights, although many of these 2nd Gen buildings still go to 30’.
36’ high buildings came in around 2023
30’ – 32’ Clear was the norm starting in 2000
24’ Clear started as far back as 1975
Older buildings are equally functional as new buildings for less rent, especially if they have a low tax basis. One exception is if the tenant plans to install interior warehouse installations like mezzanines or specialty racking and automation. In these cases, latest generation buildings have an economic advantage because of height.
Some of the calculations we perform to determine functionality include:
Location and Distance
Docks per 10,000 SF
Building to land ratio
Cubic Capacity and Cost per Cube
Property Taxes/Expenses
Ceiling height
Sublease
To identify the better buildings, we subject all available properties through a macro analysis. This is the best way to identify differences in functionality and cost when there are a lot of choices.
Here is an example:
Let’s say you are in 100,000 square feet in the South Bay and you want to double in size. Some tenants will move completely to put everything under one roof. Other tenants will look for a satellite building as an interim step. Most South Bay companies will look locally and as far as Santa Fe Springs and Mid Counties. Some will want to go as far as IE West. What will you find?
Streamlit Demo View
We model the entire market on the Kleincom Industrial Building Analysis we developed on Streamlit. For this report (100,000 SF to 250,000 SF), we identify 55 choices of which 14 are subleases with terms of at least 3 years (some up to 5). For demonstration purposes, we will leave aside, the additional 80 or so buildings in Inland Empire West (Rancho Cucomonga, Ontario, Chino, and Fontana) that meet the size requirement.
Using Ceiling Height with 24’ as the minimum, we establish the following distribution. For most tenants, 30’ to 32’ is the sweet spot.
All Buildings 100K to 250K
Buildings are dispersed over the entire Los Angeles Region.
Buildings 100k to 250K L.A. Basin
The second factor to sort the choices is the Loading Dock Ratio measuring docks per 10,000 square feet to determine loading efficiency. Any dock ratio greater than 1.5 doors/10,000 square feet is considered highly efficient and closer to 2 docks/10,000 SF is superior.
Docks Per 10k SF
Looking at the top results, it’s not always the newest buildings that are the best choices. You can lease 2nd or 3rd generation buildings for $1.75 to $1.95 per foot (all-in). About half of the buildings are 30’ or greater.
Results Table
Market Area
Size
Rate
Month
Clr
Year
Cubic Ft
Dock Ratio
B:L
Gardena/ Compton
300000
1.6
$480,000
26
1987
7800000
3.33
40%
Carson/Compton
300000
1.53
$459,000
25
1970
7500000
1.84
52%
Carson/Compton
285000
2.2
$627,000
32
2006
9120000
2.24
41%
Carson/Compton
250000
1.51
$377,500
25
1972
6250000
2.17
60%
MidCounties
250000
1.8
$450,000
32
2002
8000000
2.05
59%
Carson/Compton
150000
2.1
$315,000
36
2024
5400000
2.84
60%
Commerce/Vernon
150000
2.6
$390,000
36
2024
5400000
2.11
55%
For some tenant’s subleases may be the right answer because the terms are relatively short, and the financial commitment will be less. Ecommerce tenants and larger Amazon/Temu Sellers are drawn to subleases. The top subleases have exceptional loading and low property taxes. In most cases, landlords will renew when the lease expires.
Best Subleases
City
SF
Yr Blt
HGT
DH
Dock Ratio
Years Remaining
Carson
300000
1973
22
40
1.33
3.69
Industry
225000
1996
30
25
1.11
5.58
Torrance
200000
2000
30
30
1.50
2.69
Torrance
135000
2001
30
25
1.85
3.44
Commerce
125000
1957
22
55
4.40
5.28
Santa Fe Springs
120000
2003
30
30
2.50
3.78
La Mirada
100000
1997
30
20
2.00
2.44
Compton
100000
1981
24
15
1.50
3.02
Experienced tenants will use site plans to decide. There is a preference for a more rectangular building than a square so you can load more trucks simultaneously and divided to sub-customers if necessary. Here’s an example of two buildings of approximately the same size and asking rent. Most tenants would prefer the first building because loading exceeds 2 docks per 10,000 square feet, it has additional trailer parking, and the warehouse can be easily divided into sections while maintaining optimum functionality.
The second site plan is reasonably functional but only has 1 dock per 10,000 square feet, can only be divided in half and is less functional than the first example. For the same cost, most tenants will choose the first building.
With the high cost of land and construction costs, developers need to maximize building coverage to compete and make a profit. In other words, developers are often forced to build the largest possible building on the site while doing their best to keep the building functional. As you can see, some buildings are more functional than others.
Every tenant has different priorities, but most revolve around the same criteria of location and function. At Klein Commercial, we have 40 years of corporate real estate experience locating the best buildings for our clients. Our latest tool, the Kleincom Industrial Building Analysis, will help you make the best choice amongst all the available space on the market today.
There are a lot of industrial buildings available in Los Angeles. It’s a cyclical business and this may be the low point with interest rates projected to decline over 2024. If that’s the case the downturn wasn’t severe. For now, new development will moderate until absorption and lending pick up. Tenants may not see this opportunity for a long time to come. With falling rents, landlords need to close deals fast. If negotiations stall, that tenant will find a cheaper building.
Our analytics show a very healthy supply of buildings between 100,000 square feet and 200,000 square feet. Larger buildings are slightly harder to find because large parcels are rarer in an already developed city. Small spaces are relatively scarce, especially those with power, since there has been very little new construction in that size category for several years. Since rents are greatly influenced by property taxes, we include them when we plot rents. By far the better bargains are with long-term owners, who because of Proposition 13, have significantly lower assessments. Conversely, if you need a new, modern warehouse for high capacity uses, you still need to pay up.
Los Angeles Industrial Real Estate Price per Square Foot over 100k
China Gateway
While Los Angeles has a diverse industrial base, much of the development and leasing activity over the past two decades came directly from Chinese goods entering San Pedro Bay. The warehouse business in Southern California and as far away as Central California, Las Vegas and Phoenix have all grown because of Chinese Imports. Declining imports through Los Angeles unquestionably impacts leasing and rental rates.
In only a short period, the growth story of industrial real estate for the past 20 years started when China was admitted to the World Trade Organization. The driving force of industrial real estate was to accommodate Chinese imports with a vast distribution network of North American warehouses and container yards. The ecommerce boom, surging during the Covid period, was another large reason corporates were taking on large chunks of warehouse space. Corporations today are adjusting their needs due to new policies in targeted industries for computer chips, electric vehicles, national defense and import tariffs… And seeking new suppliers away from Chinese chokepoints.
The import amplification during the Covid period caused an outsized snarl in the supply chain. You may recall as many as 105 container ships were waiting along the Sothern California Coast for a berth. The unprecedented backlog is well over and so are the market distortions that came with the import surge. In addition, because of port delays, resiliency, and labor slowdowns, many importers made the permanent decision to shift warehouses away from Southern California to other US ports in the South and East.
Import Volumes from China into LA 1980-2023
Industrial Policy
Outside of Los Angeles and throughout many parts of the U.S., recent tenant demand has been spurred on by a massive, $2.2 Trillion federal industrial policy included in the CHIPS, IRA, Bipartisan Infrastructure Deal and a national defense industrial strategy. This combination of direct grants, subsidies, domestic content rules and friend-shoring has increased industrial building tenancy and development. Unlike organic development that occurred because of open trade, current US industrial policy is heavily supported by political decisions and lobbying. Local leaders take credit for federal subsidies and state incentives that bring employment. There are many published maps that show investment for computer chip plants, EV vehicle production, batteries, defense plants, and other new factories.
Investing in America
As industrial supply chains adapt, so does the real estate that serves them. Over the past couple of decades, an open market, characterized by Chinese imports, determined the location for industrial building development. This generally meant locations near major container ports received the most interest. In contrast, industrial policy changes trade dynamics by turning to suppliers that will support US national goals. For instance, more manufactured goods are coming through Mexico and creating more traffic for industrial products along the Kansas City Southern Railway (KCS). Monterrey to Houston, Dallas, and Kansas City are new, important links along with many of twin plants across the border towns. Another example is European manufacturers; when they seek to expand in the U.S, Europeans prefer locations in the southeast because of shorter travel times and “right to work” rules.
Kansas City Southern Railway (KCS).
Interest Rates
For Los Angeles real estate and beyond, the rapid rise of interest rates shook 2023 and put both tenants and the investment/development community in a squeeze. While not historically high, the 250-basis point increase was rapid and caused turbulence for those counting on low rates forever (or at least until they sold their building). Even with a forecast of interest rate reductions in 2024, a higher hurdle rate and an increase in the cost of carrying vacant space will provide more balance between landlord and tenant.
Interest Rates – 1970 – 2023
Over the past 15 years, particularly starting in 2008 during the Great Financial Crisis, industrial real estate became financialized as investors searched for advantageous relative returns. It put the traditional owner-user in the position of renting because all the best deals got snapped up by investor/developers. This condition started to moderate in 2023 as normality returned with more opportunities for local business owners to buy their own real estate. Don’t wait too long. There is a new wave of money entering the market. Private wealth managers are seeking alternative investments like industrial real estate. These new buyers will become more apparent as bond yields drop.
Outlook
In our areas of specialty, we see the following:
Our traditional “farm area” for over forty years is in the South Bay, particularly Gardena. This also includes Carson, Compton, Torrance, Dominguez and into the Beach Cities and portions of Long Beach. The zip codes 90061 and 90248 are also included and go by several different names, West Rancho Dominguez, East Gardena, Unincorporated County, and my favorite, “The Strip”.
South Bay industrial property is a core holding of every major industrial REIT, Pension Fund and Insurance Company. It’s notable for legendary aviation, electronics, and defense manufacturing companies; vast warehouses serving San Pedro Bay; proximity to L.A.’s transport infrastructure including the twin ports, LAX, Downtown, downtown markets and a dense freeway network. It’s central to labor, executives, and a skilled and educated workforce. The combination of appreciation and rent growth is among the best in the U.S.
The County Strip
One area that deserves special attention is “The Strip”. Over the past few years because of lax policies and enforcement, local Los Angeles government has allowed RV Campers to park on the streets bringing with it crime, squalor, drug dealing, and prostitution. The area smells of human waste and trash. This condition has caused values to plumet and tenants to flee. Finally, at the end of last year, the County started to offer more permanent housing and campers are being removed from several major corridors. While some streets have returned to sanity, if you take a drive on Redondo Beach Boulevard, Avalon Boulevard, 131st Street or Spring Streets, you will see the awful human condition. Local government leaders say they are making progress and in a hopeful start to the New Year, as the RVs are removed, values and tenants will return. Why? Location, of course.
Filling up empty buildings is a goal for 2024. In contrast to recent previous years, vacant industrial building inventory is growing (map above is 50,000 SF and greater). Many new property owners are facing headwinds from the finance markets, and they are motivated to obtain tenants. As prices settle, more tenants will see the opportunity is now! We use experience, analytics, and long-time relationships so clients are assured of the deals they make. As an independent broker, our background in corporate real estate provides a discernable edge in analysis and acumen.
Los Angeles to Inland Empire
While Los Angeles is the largest industrial building market in the U.S., and when combined with the Inland Empire, Southern California is an industrial behemoth. For many companies, “agglomeration” is the primary reason to be in Greater Los Angeles. However, many businesses continue to seek new horizons to avoid California regulation, politics, and taxation. For those businesses considering leaving California, our SIOR colleagues in the Inland Empire, across the U.S., Canada, Mexico, and Europe have helped many of my customers re-locate and add secondary facilities. In cases when we have the data, we add our analytics and custom program to find “off-market” deals.
Employment in Warehousing, Wholesale and Manufacturing across US MSAs
One area deserving caution is the newer asset class called Industrial Outside Storage (IOS). It’s been a mainstay of industrial property investment particularly near Gateway markets where imports arrive. Many investors have climbed onboard but the IOS market is heavily dependent on truck/container storage and goods arriving from China. Rents are noticeably declining, and vacancies are growing.
The industrial real estate cycle is pointing at Recession. It should not be a surprise because it was brought intentionally by higher interest rates in an effort to combat inflation. Based on my market experience, it’s a mild recession. Tenant activity is adequate, not robust. Rents are down after surging during the Supply Chain Chaos, but they are still above pre-covid levels. Sale prices are also down because higher interest rates require a price adjustment.
When rents are falling, landlords need to close those deals immediately. If they stall and get lost in the back-and-forth, that tenant will skip to a cheaper building.
There are overleveraged buyers who purchased at the peak when rents were their highest. The best example are outside storage yards. But almost any building that was purchased with short term or adjustable-rate finance will have to digest higher rates with some needing to add cash. Businesses, too, are facing higher interest rates. Private credit facilities have entered the void left open by the banks. These companies, who own their real estate, are motivated to sell and leaseback.
The current financial environment makes Sale Leasebacks advantageous for both buyers and sellers. In periods when it’s difficult to obtain financing, lenders will be more generous with a 10 year (or longer) lease in place. Corporate sellers and owner-occupiers, facing higher interest rates, can look to their owned real estate to raise lower cost financing in a Sale leaseback transaction.
There are generally three different types of sale leasebacks:
The first is an Absolute NNN lease with no landlord responsibility including casualty and condemnation. The tenant keeps paying rent no matter what. It has elements of a corporate bond in its reliance on the tenant’s credit. A Credit Tenant Lease is for critical manufacturing, distribution, or infrastructure for a long term lease with a rated tenant.
The second form of Sale Leaseback is used to raise cash for lower rate financing or for other financial engineering reasons. Owner users and corporates can unlock years of “unrealized” equity. There are often balance sheet advantages. Sale Leasebacks are routine with private-equity owned businesses. Pricing is closely related to the tenant’s credit rating.
US Industrial Markets
The third type of Sale-Leaseback is in name only. Because either the lease term is short, or tenant credit is weak. These deals are more fully underwritten on the real estate. Tenant term and credit is less a factor than building quality and market acceptance. Buildings in major metros that are easy to backfill are good candidates.
A good use of the sale leaseback is with growing companies. Retailers are a common example. In the manufacturing realm many companies benefiting from the Inflation Reduction and CHIP Acts are using Sale-Leaseback’s to finance their new factory building and acquisitions.
Sale leasebacks are a common tool in the CEO playbook. Located in Los Angeles, we ally with local SIOR independent, market experts from across North America and Europe to support our activities. We will respond rapidly to industrial building opportunities you may have in Los Angeles and elsewhere in the United States.
Rents are declining from pandemic highs. The rent range for greater Los Angeles (including property taxes) is $1.00 per foot for older spaces to over $2.50 per foot for newer bulk space. More space is available in almost all size categories. Smaller spaces are rare due to the higher cost to build. One note for the South Bay. Rents are lower in The Gardena/County Strip area because of RV encampments, concerns of employee safety, and local government failure. Rents are highest in the LAX, Beach Cities, and LAX where there is high-tech manufacturing, defense and airfreight.
Property Taxes
Property Taxes have a big impact on rents. At one time, property taxes were only a few cents per square foot (psf) but with a rise in property values, it’s common to see up to $.50 psf once properties are reassessed. It can be 25% or 30% of your total rent. Due to Proposition 13, when a property is sold, taxes are re-assessed at the new value and that increase is normally passed through to tenants. Looking at the chart below, lowest taxpayers are almost always longtime property owners, families or partners. High taxes are more common because of the long investment boom since 2010.
Power
Tenants seeking heavy power, 2000 AMPs or greater, will face delays of twelve (12) months or greater because electrical switchgear and transformers are on back order. Many tenants are seeking EV chargers which increases load. In some parts of town, vandals strip vacant buildings of electrical breakers and copper wiring making the buildings inoperable. The graph below shows there is an ample supply of buildings with sufficient power. Many buildings with the most power will lack the most modern features since they date back from L.A.’s manufacturing past. Developers are installing large panels in their new buildings.
Industrial Sale Market
Higher interest rates have changed everything. Relatively high rates have restrained the long investor led boom since 2010. With many investors sidelined, owner/users have the opportunity to buy. Even at current mortgage rates, the loan payment approximates the amount you would pay for rent. Loans are prioritized for long term credit tenants and not risky investment deals. Large acquisition funds are selling their less desirable assets. Carrying paper is attractive.
Jim Klein, SIOR a 40-year background of industrial real estate brokerage and investment in the Los Angeles area. Our specialty is representing corporations and local landlords. While we practice in Los Angeles, we have moved many customers out of state with help from our SIOR colleagues throughout North America. Klein Commercial recently added new sales staff, IT and analytics to our brokerage service. Please consider us for your next industrial real estate deal.
This summer we are expanding our research and analytics to help you find the right deal. In Los Angeles or anywhere else in North America. We are growing by hiring two new salespeople, an IT manager, and a data scientist. Please contact us for a consultation about your next industrial real estate deal.
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Higher interest rates created a lull in the market but with forecasts showing interest rate declines starting in 2024, investors are looking for opportunities. There’s plenty of liquidity at the right price. Owners and tenants alike are vulnerable to current higher interest rates if they need to finance. This has caused some property owners to look at their real estate to raise cash. It’s a favorable time to sell if there is income in place through a sale leaseback or other long term leases.
Sophisticated industrial building investors own almost half the buildings in Los Angeles County greater than 25,000 square feet and they are continuing to buy more at today’s adjusted pricing.
Through research, we can identify those properties that are held by sophisticated investors compared to property owners that have less experience. Once mapped, we can precisely see where investors prefer to be located and which buildings they would like to purchase.
For tenants in the market, we use similar data to help you find the best buildings. We focus on total occupancy cost and building utility. Warehouse economics includes measurement of total cost per square foot (including property taxes), docks per 10,000 SF, and cost per cubic foot. By comparing cost and utility, we can often identify the “best deal”. We also use subjective measurements that include landlord sophistication and property basis. Variables are shown on the report below we recently did for a Gardena tenant. We will be depicting the results on a scatterplot for easier reference.
Incidentally, this map shows how few buildings (over 10,000 SF) are available for lease in Gardena. It’s a tight market with few vacancies (shown in blue).
Thank you for subscribing and please contact us with any of your industrial building inquiries. You can use the QR code below to redeem for superior industrial real estate knowledge and service.
Thank you,
Jim Klein, SIOR
310-451-8121
jimklein@kleincom.com
Industrial real estate is a diverse business that includes Investment funds, developers, private/family owners, corporations, occupiers, and a mix of product types and industries. Industrial buildings are in every community and are the source of employment, production, distribution, and wealth for many. The nation’s economic health rides on the success of industrial real estate.
There are several factors that are driving deals today. Broadly, these include Interest Rate Policy, US Industrial Strategy, and Local Municipal Governance. Everyone is affected differently. For example, higher interest rates are never good for real estate, though they affect sales more than leases; sale transactions are interest rate sensitive while leasing is supply and demand based. As an experienced broker, we use detailed knowledge, market analytics, and long-standing relationships to help you in making the best decision. Continue reading “How Is Industrial Real Estate Today?”
The geography of Gardena needs explanation. There is the City of Gardena proper and three times larger than the city boundary, is the Gardena Postal Zone. The larger Gardena area includes parts of Unincorporated Los Angeles County (West Rancho Dominguez), City of Los Angeles Strip, and the northwestern part of Carson. The zip code 90061 is also included in most market studies of Gardena because it squares off the uniform industrial portion of West Rancho on the north side. When someone asks me how the real estate business is in Gardena, it depends where you are located. Each municipality has its own zoning regulations and homeless policies which have a direct relationship to the individual parcel value. Continue reading “New Gardena Industrial Commentary”
(This article has been updated with relevant links below)
Industrial property owners in the West Rancho Dominguez Planning District of Los Angeles County are facing another downzone in the Metro Area Plan. The M1 (Light Manufacturing) is being replaced by a new, more restrictive category, M.0.5 (Artistic Production and Custom Manufacturing). This zoning limitation will reduce the pool of economically feasible tenants and lower the rents property owners can charge. While most citizens of Los Angeles don’t cry over the landlord’s income, the unintended consequence will be plant relocations and job losses. Continue reading “New Industrial Down Zone for West Rancho”
