Fundamentals Remain

Despite the national news trying to create panic that a recession is imminent due to an inverted yield curve or escalating trade wars, the Los Angeles/Long Beach Industrial Real Estate Market remains resilient. E-commerce continues to drive a large share of the demand for industrial real estate. According to UCLA Anderson Forecast senior economist David Shulman, "E-Commerce has accounted for 34% of the growth in the addressable market since 1999 and an astounding 47% of the growth in the five years ending in the fourth quarter of 2018...With strong demand for close-in industrial space, the US is seeing increased construction of multistory warehouses, the type that have typically been found only in Japan." A growing number of consumers continue to transition to purchasing goods online. This primary driver fuels the demand for Los Angeles/Long Beach Industrial Real Estate. Fundamentals remain overall for industrial real estate with positive absorption, low vacancy rates and higher asking rental rates.

The direct industrial vacancy rate in the Los Angeles/Long Beach marketplace increased slightly from 1.2% in the 2nd Quarter to 1.4 in the 3rd Quarter, as more product was delivered and absorbed in the marketplace. Asking rents increased again in the 3rd Quarter to $1.09 PSF up from $1.08 PSF the previous Quarter. Rents have increased over 7% since the 1st Quarter of 2019. The vacancy rates this time last year was 1.5%, which despite the numerous construction projects in the pipeline and those delivered into the marketplace have had an effect on the vacancy rate. Growth should persist with macro factors trickling down to our local economy. According to David Shulman, Economist for the UCLA Anderson Forecast, "...we anticipate a $250 billion infrastructure program and a material increase in defense appropriations coming from increased global tensions, especially with respect to North Korea, which will make missile defense spending a top priority...Aside from defense, the sources of growth over the next two years will come from consumption, housing (in 2018) and equipment spending...Inflation will increase modestly, running slightly above the 2% range." The combination of full employment and higher inflation will prompt the Fed to continue its tightening policy by raising interest rates in their continued pattern of 25 basis points per quarter.

The average sale price decreased in the 3rd Quarter 2019 to $208 PSF. Sales volume has increased through the year from $153.96 Million in the 1st Quarter to $269 Million fro the 3rd Quarter. Lack of land sites had an effect on development activity in the Los Angeles/Long Beach region with 849,602 SF under construction, down from the previous quarter of 1.24 Million SF. Costar reported, "The largest trade over the first three quarters of 2019 came when GPI Cos. acquired Mattel's 192,000 SF design facility in El Segundo for $84 Million, or roughly $40/SF, at a 4.6% Cap Rate. That's roughly 45% higher than the average per square foot price for LA flex properties, and represents nearly 90% price appreciation over the $45 Million that Seller Angelo, Gordon & Company paid to acquire the asset in 2011. The facility, fully leased to Mattel on a NNN basis through 2024, was built in 1954 but received extensive updates valued at roughly $10 Million in recent years."

This minimal growth should persist into the 4th Quarter led largely by historically low interest rates, marijuana overlays and E-Commerce demand. New multi-tenant residential projects should continue to be greatly discussed, as Governor Newsom is pushing cities to try and make affordable housing a priority in an attempt to combat homelessness. Small and medium sized businesses will continue to get squeezed by historically high lease rates that put pressure on their margins. The insatiable appetite for product among Users and Investors seems to be leveling off. This trend likely will persist and we should continue to see sale prices increase, depending on the type of product. This will be a great opportunity for Property Owners to put their properties up for sale or lease to capture these historic high values. Interest rates are still historically low, and these low rates continue to encourage business owners to take advantage of the favorable market conditions. As seen last quarter, Industrial properties for lease or sale will be difficult to find, while newer facilities will be built to support fulfillment centers and the move towards electronic retailing.

Despite the background noise globally and nationally, locally the market signals for Los Angeles/Long Beach Industrial Real Estate product is fundamentally strong heading into 4th Quarter 2019. Please message me for more perspective on your sub-market and guidance to fully leverage your situation.

Brandon Carrillo, Principal