SoCal Industrial Market Faces Temporary Slowdown

In 2024, Southern California’s industrial markets have experienced a slowdown for the first time in years, driven by cooling demand and a surge in new supply, leading to higher vacancy rates and slower rent growth, according to the latest CommercialEdge report.

While long-term prospects remain strong, the near-term outlook suggests continued softening. Although in-place rents have grown significantly over the past year, the average cost of new leases has dropped, reflecting weaker market conditions. Prologis, the largest industrial REIT, also reported sluggish demand in the region and predicted soft conditions over the next year, with effective rents declining due to growing concessions.

Despite the cooling industrial market, the ports of Los Angeles and Long Beach recorded two of their busiest months ever in July, indicating that the slowdown may be temporary. However, the surge in container volumes is unlikely to immediately impact vacancy rates, as logistics firms and importers have adapted by maintaining excess capacity. The long-term outlook for the region remains positive, even as the supply boom tapers off, CommercialEdge predicts.

READ ALSO: The Industrial Strength of the Inland Empire

A total of 379.0 million square feet of industrial space was under construction nationwide at the end of July, accounting for 1.9 percent of total stock, CommercialEdge data shows. After adding over 1.1 billion square feet in 2022 and 2023 and expanding stock by 5.8 percent, the pace of new deliveries has started to slow in 2024. With 229.3 million square feet delivered in the first seven months, the slowdown is just beginning. Construction starts, which topped 500 million square feet in 2021 and 2022, have dropped to 127.2 million so far this year.

The largest pipelines on a percentage-of-stock basis were found in Phoenix (9.2 percent, 36.9 million square feet underway), Kansas City, Miss. (4.0 percent, 11.8 million square feet), Memphis, Tenn. (3.4 percent, 10 million square feet), Denver (3.0 percent, 8.1 million square feet), Charlotte, N.C. (2.8 percent, 8.1 million square feet) and Central Valley, Calif. (2.5 percent, 8.9 million square feet). Meanwhile, industrial sales year-to-date in July totaled $30.7 billion.

New industrial leases command premiums

In July, the national average rent for industrial space reached $8.15 per square foot, marking a significant rise of 730 basis points compared to the previous year and an increase of 11 cents from the previous month. Once again, the Inland Empire led in rent growth, with in-place rents rising 12.4 percent over the past year, followed by Los Angeles at 11.0 percent, Miami at 9.7 percent, and New Jersey at 9.0 percent. Orange County experienced an 8.7 percent increase, while Phoenix saw an 8.4 percent rise.

Meanwhile, the national industrial vacancy rate climbed to 5.6 percent in July, a 30-basis-point increase from the previous month. This rise in vacancies is largely due to the historic level of new supply delivered over the past three years. According to CommercialEdge, Charlotte reported the lowest vacancy rate at 3.7 percent, closely followed by Columbus at 3.9 percent.

The average rate for new leases signed in the past 12 months was $10.54 per square foot, which is $2.39 higher than the average for all leases. Although vacancy rates have increased due to the influx of new supply, the modern, high-quality spaces being introduced are commanding higher rental rates than existing stock. In Miami, new lease rates were $5.76 per square foot above the market average, with significant premiums also observed in Charlotte ($3.94), Dallas ($3.57), Los Angeles ($3.55), and Nashville ($3.51).

Read the full CommercialEdge report.

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