Monday, February 16, 2009

Los Angeles Industrial Property Market Under Pressure

Vernon Los Angeles Warehouse Exterior View As the regional economy continues to sputter, vacancy rates are beginning to climb at warehouses and distribution centers for industrial goods. After years of high occupancy and rapid construction of cargo hubs, immense spaces are now standing empty. Nearly all of these warehouses and shipping hubs are located in San Bernardino and Riverside counties, where a long-running industrial real estate boom is finally starting to go bust.

More centrally located industrial properties in Los Angeles and Orange counties are also beginning to feel the pinch, although the modest increases in vacancy rates are still considered healthy by industry standards. Many of those properties are rented to small entrepreneurs who are hunkered down but so far toughing out the economic downturn.

Vernon Los Angeles Warehouse - Interior ViewIndustrial property construction is always rare in Los Angeles County, where it's hard to find land to build on. A 400,000-square-foot building under construction in Commerce is the only one of its size being built in a market with 700 million square feet of existing space, said Cushman & Wakefield's McMillan.

With the market softening, many Los Angeles landlords are sweetening their offers to tenants by paying more for their interior improvements and giving them a few months' free rent if they sign a lease.

Competition among investors to buy industrial properties has dropped dramatically because investment financing is hard to come by. Fortune 1000 companies these days treat real estate more like a just-in-time commodity that they acquire and shed to suit economic times, Frankel.

For all the current hardships, boosters say the Inland Empire industrial market is well positioned for a comeback when the economy improves, perhaps by 2010, because of its low-priced housing, ample workforce and desirable location for international shipping. [Source]

Gardena Los Angeles warehouse - Interior view

The Los Angeles Times' recent article points to the downward pricing pressure on warehouse and other industrial spaces in the Los Angeles area. As far as the central Los Angeles area is concerned (within 10 miles of the axis from downtown LA to LAX), there is little risk of over-building since the area is so space-constrained and there remains little vacant land in commercially zoned areas.

On the leasing side, there is downward pricing pressure on rents. On the sales side, many building owners are pricing their buildings well above the market. These buildings often remain vacant for months (or even years) since there is a general lack of demand for this product type. The question is whether industrial property owners will go into default, and what these owners will do when attempting to refinance their loans that are maturing in this era of limited credit.

Jamie Adner