Q3 2023 Industrial Market Trends – San Fernando Valley
The demand for warehouse space in the San Fernando Valley shifted as the vacancy rate increased by 80 bps from last year
to reach 2.4% – the highest level in 8 years. New developments and an increased supply of industrial space are now trailing
behind diminished demand. In Q3, completed construction added 256,821 sq. ft.. Over the past five quarters, the San Fernando
Valley added roughly 312,000 sq. ft. of completed construction to the market, while leasing volume resulted in 666,434 sq. ft.
during the same timeframe. While land constraints limited new development, developers aggressively pursued keeping pace
with economic growth and the seemingly unending demand for warehouse space across the region, driven by e-commerce,
which has mostly been satisfied now. Companies that overestimated their space requirements are putting sublease space
on the industrial market. This has led to a significant increase in the amount of available sublease space on the market, up
by 24.2% (150,000 sq. ft.) from the previous quarter and by 149% (450,000 sq. ft.) from the same time last year.
TRENDS TO WATCH
The primary driver pushing for new construction has been strong rent growth. In this quarter, the average asking rent grew at a
slower pace, bumping up by merely 1 cent from the previous quarter to $1.76 NNN, while it showed an 11.4% rise from Q3’22.
This slowing in rent growth creates concerns for developers and yet provides a more positive outlook for tenants seeking leases
in the future. The increase in vacant industrial space offers tenants more options, although high prices and rising interest rates
have weakened industrial building leases and sales. Leasing volume declined 34.2% from the prior quarter and 13.8% year to
date from last year at this time. Sales volume dropped 48.2% year to date from Q3’22. The average sale price per square foot
has registered at $315, reflecting a 6.1% drop quarter over quarter. The combination of rising interest rates, a slowing economy,
and softening demand will have a dampening effect on pricing heading into the end of the year.