Third Quarter 2024

Opportunities Emerge as Vacancy Continues Two-Year Rise in L.A. County Industrial Market

Vacancy Rates Climb, Construction Slows, and Prices Adjust as Economic Pressures Reshape Industrial Real Estate.

The increasing availability of warehousing options is expected to drive the market.

Managing Director, Research and Public Relations at NAI Capital Commercial
 
MARKET OVERVIEW
 
In Q3 2024, the industrial space vacancy rate in L.A. County rose to 5.5%, reflecting a 180-basis-point (bps) increase year-over-year and a 20-bps increase from Q2 2024. Over the past three quarters, L.A. County added approximately 3.8 million square feet of completed construction to the market, while absorption turned negative, with 9.4 million square feet vacated, signaling a continued shift in the industrial market’s trajectory. The rise in vacancy this quarter was partly driven by the addition of new inventory, including a state-of-the-art 694,400-square-foot warehouse distribution facility at Grand Crossing South—precisely the type of modern, high-quality space in demand within the San Gabriel Valley industrial market.

The amount of industrial space under construction decreased by 31.5% year-over-year and 6.4% from the previous quarter. Completed construction also slowed significantly—down 82.9% quarter-over-quarter but up 9.5% year-to-date compared to Q3 2023. Developers, once racing to complete warehouse space to meet the e-commerce boom, have slowed down due to waning demand, rising material and labor costs, and cooling asking rents. The once double-digit rent growth has now shifted to a double-digit rent decline, with the average asking rent dropping 16.0% year-over-year to $1.47 per square foot (NNN) and falling 3.3% from Q2 2024.

Sales volume increased 13.1% quarter-over-quarter but remained 37.4% lower year-to-date compared to the same period last year, with approximately 9.5 million square feet sold by the end of Q3 2024. The average sale price per square foot dropped 15.0% quarter-over-quarter to $271 per square foot, 2.0% below last year’s level. Leasing volume edged up by 2.3% from Q2 2024, closing the quarter with 9 million square feet leased. However, despite 26.2 million square feet leased year-to-date, leasing activity was down by 8.5%.

TRENDS TO WATCH
 
Lower leasing velocity remains a concern but also presents opportunities for more favorable deals. The increasing availability of warehousing options is expected to drive the market, as companies seek flexible solutions to meet evolving demands. Vacant sublease space continues to rise throughout the region, up 14.8% from Q2 2024 and 41.5% year-over-year, totaling approximately 6.4 million square feet—a new all-time high. In the South Bay alone, vacant sublease space has ballooned to 1.5 million square feet, a 70% increase from last year, as many logistics companies continue to shed excess space. This suggests that companies with warehousing needs will have ample options, especially with cargo volumes through the Ports of Los Angeles and Long Beach remaining robust. Inbound loaded TEU cargo volumes—a key driver of warehouse space demand—increased by 22.5% year-to-date as of August 2024, while outbound loaded volumes grew by just 0.8%, underscoring the trade imbalance between imports and exports.

While growth may slow, prices are expected to undergo mild adjustments as elevated interest rates continue to impact industrial building sales. Sales dollar volume fell 6.1% quarter-over-quarter, with the year-to-date total down 19.4% from last year, registering $2.8 billion. The median sale price per square foot declined by 16.6% quarter-over-quarter and dropped 9.0% year-over-year, reflecting ongoing pressure in the market. L.A.’s industrial market, centered around the Ports of Los Angeles and Long Beach, gained national attention during the recent East Coast port strike. However, AB 98 now poses a threat to this vital industry, imposing regulations that could hinder growth, limit warehouse development, and impact local jobs. Governor Newsom signed AB 98 into law on September 29th, with the new regulations set to take effect on January 1, 2025.

Taxation and regulation continue to be significant factors influencing investment decisions, but interest rates and borrowing costs are equally critical as the Fed remains focused on controlling inflation. Industrial property prices, while resilient, have cooled from all-time highs as rising interest rates slow sales. With the Fed’s rate cut and demand continuing to slow, downward pressure on pricing is likely to persist through the end of the year, creating opportunities for savvy investors to capitalize on.

 

LOS ANGELES COUNTY INDUSTRIAL MARKET STATISTICS Q3 2024