Industrial Real Estate Shortage
The lease length of typical industrial real estate buildings was an average of five years in Los Angeles County in the past. However, today it is common to have a three year lease. As a result, the property owner can take advantage of rapidly rising lease rates with a shorter lease term. Frequently, the lease rate is also increased annually in accordance with the consumer price index or at a low flat annual fixed rate.
Unexpectedly, Industrial real estate rents have increased 12% per annum in Los Angeles County in the past three years. This phenomenon is partly due to a greater demand for industrial buildings from the rise in ecommerce in addition to many other factors. The low construction rate of development after the Great Recession caused a lack of supply. There is a shortage of construction labor, the trade tariffs are increasing material costs and the rising interest rates are making it harder for developers to secure loans. In addition, there is no available land in Los Angeles County to build industrial buildings.
Industrial vacancy rates in Los Angeles County are at an all-time low of 1%, according to AIR CRE. Consequently, there are no vacant industrial buildings for companies ready to move into immediately. Prices are only going to increase the remainder of this year and beyond until more industrial buildings are developed in Los Angeles or a slowing in the economy occurs.
Many the of old industrial buildings have been converted into creative office space in Los Angeles County; as a result of the tech industry expanding south from Silicon Valley and leasing industrial creative office conversions. Consequently, there is an overabundance of large creative office buildings that can’t lease space. The Pen Factory on Olympic in Santa Monica is still trying to lease 132,000 square feet after opening in 2017. In addition, the old Xerox buildings in El Segundo now called Ascend at Utah Avenue Campus by Frank Gehry were completed this summer and they still remain unleased.