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Category: Industrial Tags: Industrial, los angeles, Orange County, Southern California
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In Southern California, several asset types flourished through COVID-19, but one sector, in particular, stood out among the rest – the industrial sector. The region holds access to the twin ports of Los Angeles and Long Beach, which contribute to the booming import business. These local ports handle 78 percent of the West Coast’s container volume and nearly a third of all imports to the United States. Southern California houses some of the world’s top metros, boasts a diverse economy, and possesses a dense population, and there is no shortage of manufacturers and distributors who demand space in the area. According to CoStar, Southern California has over two billion square feet of industrial inventory, but the limited land availability forces investors to target infill development opportunities. In this article, Matthews™ reviews the influences
that drive the area’s industrial demand and takes a closer look at the market performance in Orange County and Los Angeles.

 

DEMAND DRIVERS

According to Commercial Observer, Los Angeles reached $2.8 billion in industrial sales from January to August 2021, the highest of any market in the nation, followed by the Inland Empire with $2.3 billion in sales. During that same time, Los Angeles, the Inland Empire, and Orange County accounted for over 15 percent of the entire country’s industrial real estate transactions by dollar volume.

 

Twin Ports
Southern California benefits from being the nation’s largest U.S. gateway for ocean-going trade due to the Twin Ports located adjacent to Los Angeles and Long Beach. The Port of Los Angeles alone experienced increased volumes by 50 percent in the second half of 2020, with the port handling 94 percent more traffic the week before Christmas. As of May 2021, regional port activity is up 74 percent from last year, the highest annual gain on record. According to Drewry World Container Index, the average rate to ship a 40-foot container from Shanghai to Los Angeles cost $1,800 from 2011 to March 2020. As of July 2021, that price has surged to $9,631, a 229 percent increase compared to July 2020.

 

The Port of Los Angeles reported breaking eight monthly records between June 2020 and June 2021 and experienced the top four individual months in its 114-year history. Source: Bisnow

 

Online Ordering
The driving demand for Southern California industrial can be attributed to e-commerce, cold storage, and last-mile distribution. Despite these attributes being present pre-pandemic, the nationwide reliance on online ordering and shipping plus evolving consumer trends have bolstered the industrial market to perform better than it ever has before. Industrial tenants are rushing to accommodate faster supply chain turnaround as consumers stay at home and demand faster deliveries, demonstrated by e-commerce sales jumping 55 percent to $2.8 billion per quarter during the pandemic, according to CoStar. For example, FedEx Ground reported a 25 percent year-over-year jump in average daily package volume, reaching 13.2 million packages in Q1 2021.

 

E-commerce giant Amazon has been particularly active in Orange County since 2016, when its first major operation opened in Irvine. The 202,000 square foot building serves as a main fulfillment center in the region. The company continues to lease several spaces in Orange County, a previously uncharted territory, to accomplish faster delivery.

 

 

Growing Aerospace Efforts
Southern California is dubbed the birthplace of aerospace and defense manufacturing, with decades of support from government contracting companies such as Northrop Grumman, Boeing, and Raytheon. World War II sparked the industrial development boom in Southern California as a result of the space race and Apollo program. Today, the rise of SpaceX and Virgin Orbit has revived the industry, with extensive engineering and technical talent reappearing in the region. Long Beach, specifically, has been working diligently to build its reputation as “Space Beach” – a hub for aerospace technology, research, and development, by preserving industrial space dedicated to aerospace manufacturing and turning down e-commerce tenants. Southern California’s history and prominence in aerospace attracted several companies, including Lockheed Martin, Relatively Space, Virgin Orbit, SpinLaunch, and Rocket Lab.

 

 

MARKET SPOTLIGHT: ORANGE COUNTY

Though Orange County is not a logistics hub and does not have its own ports, its industrial sector
is resilient as tenants and investors both target properties suitable for last-mile delivery in the market. Its proximity to the Los Angeles and Long Beach ports, access to five major freeways and John Wayne Airport, and diverse economy have increased leasing activity, tightened industrial vacancies, and promoted healthy rent growth.

 

Leasing volume reached banner levels as medical device companies and logistics-oriented operators committed to large blocks of space. Source: CoStar

 

Orange County boasts the highest industrial rents in the country, with an average rent of $15.60 per square foot, a 7.4 percent year-over-year growth, according to CoStar. Demand is exceptionally high for logistics assets from e-commerce and third-party logistics firms, enabling landlords to hike rents by 9.7 percent year-over-year. Sales have reached $1.7 billion year-to-date, not far behind the five-year average of $2.1 billion in annual sales volume. Institutional capital has been very active in Orange County, pushing the average price per square foot to $280. The average cap rate is on par with the three-year average of 4.6 percent, among the lowest in the country for industrial assets.

 

Due to its lack of undeveloped land, Orange County is primarily an infill market, witnessing minimal new deliveries during the last few years. Infill industrial operations have served as a vital component to many companies’ supply chains for decades and have only heightened in their role with the explosion of e-commerce. Orange County is one of the most supply-constrained metros in the nation. For example, of the 1.9 million square feet underway, 90 percent is already preleased.

 

Given the high demand for industrial space in Orange County and the lack of available land and older stock, redevelopment trends are taking off. According to experts, office properties are being targeted for repurposing opportunities, which ends up costing nearly the same as buying a ground-up industrial property.

 

 

MARKET SPOTLIGHT: LOS ANGELES

As the second-largest city in the U.S., Los Angeles has long seen demand from industrial tenants, as the market provides access to millions of customers. The market offers several modes of transportation and shipping, including the Los Angeles International Airport, Long Beach Airport, the Twin Ports, and several highways.

 

Industrial sales have soared in Los Angeles as investors focus on industrial assets due to the mature market. Vacancies have hovered around two percent for the last five years. Leasing activity picked up at the beginning of 2021, and the market is projected to reach the highest total annual net absorption in its history. Further contributing to the low vacancies are the significant transactions by aerospace and defense companies.

 

Asking rents have grown 7.6 percent year-over-year, above the national average of 6.6 percent. Burbank and Glendale have the highest asking rates because of their proximity to studios, creative offices, and traditional offices. However, rent growth is most prominent in areas supporting manufacturing and trade as many manufacturers demand industrial space close to the ports.

 

The Los Angeles metro is a top market in terms of transaction volume, totaling $5.3 billion year-to-date, according to CoStar. It is not far behind 2020’s $5.6 billion, which was the second-highest dollar volume in industrial assets for the market. The market boasts a price per square foot of $250, more than double the nation’s average of $123. With investors targeting Los Angeles for its strong appreciating market fundamentals, the average price per square foot is expected to increase.

 

 

Supply growth is limited in Los Angeles for the lack of developable land and high property values. In fact, the incredible demand for industrial space in the metro has bolstered overall property values in Los Angeles County, according to the assessor’s office. Net property values increased by $62.8 billion, a 3.7 percent increase compared to last year. There are 4.3 million square feet under construction, accounting for 0.5 percent of inventory. Investors are buying land with properties already intact with tall clear heights to convert for industrial purposes. In other cases, industrial users are buying land for additional outside cargo storage.

 

 

The industrial sector witnessed new heights during and after the pandemic, with a concentration in Southern California. While other sectors suffered from work from home orders, industrial benefited from e-commerce, shipping, and cold storage demand. Southern California is undoubtedly an industrial hub, with Los Angeles and Orange County as some of the top markets in the industry. Vacancies, rent growth, and demand all surpassed the national average due to their dense populations, accessibility to ports, highways, airports, and the established aerospace and defense manufacturing industry. Southern California will continue to be targeted by investors, in turn fueling more growth.

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