Incredible Growth Persists
Incredible demand has outstripped the limited supply in the Los Angeles and Long Beach Industrial Real Estate Markets. The market has experienced four consecutive quarters of sub 1% vacancy. We have not seen this low of a vacancy rate over multiple quarters since 2007. This can be attributed to the LA and Orange County markets totaling over a trillion dollars of gross domestic product this past year. According to the federal government’s recently released annual accounting of business output of the LA-OC region’s gross domestic product, a broad measure of the value of all business done in a geographic region, rose by $38 billion last year to $1.002 trillion. To put this in perspective, if LA-OC was its own state, its annual output would rank directly behind New York and Texas, just ahead of Florida in GDP. Globally, LA-OC is on par with the national outputs of Mexico and Indonesia. LA – OC is beating the nation’s 2.2 percent yearly pace with an average 3.1 percent annual growth. This fact has accelerated companies growth and investors dollars into the Los Angeles/Long Beach Industrial Real Estate Market and our vacancy rate is a key indicator.
The direct industrial vacancy rate in the Los Angeles/ Long Beach marketplace remained relatively flat from 0.7% in the 2nd Quarter 2017 to 0.8% in the 3rd Quarter 2017, as more product was delivered and absorbed in the market place. Asking rents increased again in the 3rd Quarter to $0.91 PSF up from $0.88 PSF the previous quarter. We have seen over 8 quarters of positive rental growth. Rents have increased over 10% since the 1st Quarter of 2017. The vacancy rate this time last year was 0.7%, which despite the numerous construction projects in the pipeline and those delivered into the marketplace have not had an effect on the vacancy rate. 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 increased in the 3rd Quarter 2017 to $172 PSF. Sale volume has increased immensely throughout the year from $76.8 Million in the 1st Quarter to $316 Million for the 3rd Quarter. Lack of land sites had an effect on development activity in the Los Angeles/Long Beach region with 1.1 million SF under construction down from the previous quarter of 1.8 million SF. The sale of Toyota’s Headquarters in Torrance consisted of 110 acres of industrial, office and land and was sold to Sares-Regis, a local commercial developer. According to Peter Rooney, President of Sares-Regis’ Commercial Development Division, “…we have no plans to do residential there given the location (is) next to the refinery…(Toyota) will be occupying some of the building through the third quarter of 2018…They are keeping their distribution center on the site…We’re looking at all the buildings and assessing the (sites that ) Toyota occupied for 25 years.” CAP Rates continue to be pushed downward as investors clamored for the limited quality investment projects in the area. The recent sale of 15913 Main Street, Gardena (114,016 SF/ $217 PSF) was sold at a 3.89% Cap Rate to Terreno Realty, which is approaching an all time low for industrial.
According to the Bureau of Labor Statistics, the California unemployment rate dropped 0.6 percentage points from 6.7% in July, 2016 to 6.1% in July, 2017. Unemployment rate for the US was reported at 4.3%, down from 4.9% over the same time period. The Los Angeles-Long Beach-Glendale metropolitan statistical area job creation totaled 49,900 over the past year. Industrial using jobs (industries include manufacturing, construction and trade transportation and utilities) remained flat from July 2016 to July 2017. “The July jobs numbers brought good news to California, notes UCLA Anderson Forecast Director and Senior Economist Jerry Nickelsburg. The state’s unemployment rate ticked up to a still low rate of 5.1% from July’s 4.8%, likely a result of more job seekers brought into the market, but not more jobs.” Nickelsburg further states, “We expect California to continue to grow at rates slightly faster than the US. The unemployment rate is expected to have its normal differential to the US rate at 4.5%.”
This incredible growth will persist into the 4th Quarter led largely by historically low interest rates, the continued advancing of “marijuana zoning” and ecommerce demand. Home building projects should accelerate with Governor Jerry Brown signing a bill recently to help spur more affordable housing while reducing government fees. Small and medium sized businesses will continue to get squeezed by historically high lease rates. The demand for buildings continues to grow and it shows no signs of leveling off. We believe this trend will continue and we will continue to see sale prices increase. 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 low, and these low rates will continue to encourage business owners to take advantage of the favorable market conditions. As seen last quarter, Industrial properties for lease or sale will continue to be difficult to find while new facilities will be built to support eCommerce fulfillment centers and the shift towards electronic retailing. Lee & Associates expects the Los Angeles/Long Beach Industrial Real Estate market to remain strong heading into 4Q, 2017.