[co-author: Barbara Perrier]
For the last three years, California’s industrial market has been a bright spot, with consistently high occupancy rates and superior lease rate growth. According to the Winter 2022 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, optimism has reached its highest level in the last seven years. To understand what’s happening in the industrial space, Alain R’bibo, Real Estate Partner at Allen Matkins, and Barbara Perrier, Vice Chairman of CBRE, break down some of the top trends in the industrial market.
1. DEMAND FOR SPACE WILL CONTINUE TO OUTRUN SUPPLY
Demand for industrial space in California is at an all-time high due to a combination of strong retail sales and supply chain challenges. Companies want to keep inventory on hand, not only for fulfilling just-in-time delivery. They’re dealing with a public that has lost confidence in the nation’s delivery systems. R’bibo and Perrier agree.
“Supply chain challenges are real,” according to Perrier. She adds that buyers are looking for property to maintain “just-in-case” inventory. Last year, the amount of leased space increased by 1 billion square feet. Many of these leases were for five-year terms, further evidence that suppliers don’t believe supply chain issues will resolve soon. They want their product available onshore, ready when their customers want it.
R’bibo points out how the backlog at the ports has underscored the need for industrial space. “Companies don’t need to store as much product if they have a high degree of confidence that it will get through.” Unfortunately, the backlog has decreased this confidence, so consumers want to store even more product locally.
2. ASTONISHINGLY LOW VACANCY RATES ARE DRIVING DEVELOPMENT INLAND AND TO THE NORTH
California markets are taking advantage of new development. Vacancy rates in Los Angeles and the Inland Empire are under 2%. In Sacramento and the East Bay Area, vacancy rates fall between 3% and 4.5%. As a result, developers are searching for more land. Perrier points out that the Inland Empire has already filled up, so people are looking elsewhere.
“They’re pushing out to the desert and high desert,” says Perrier, noting increased interest in Banning, Palm Springs, Palm Desert, and Victorville. Land prices have doubled in the past year, making it difficult for developers to find large chunks of land. Adding to this, entitlement issues increase development time, leading some developers to look at markets in Arizona and Nevada.
R’bibo cautions that delivery cannot move too far beyond city borders, despite the growing amount of industrial space available on the outskirts. “Businesses still need to get product to consumers at a fast pace,” he points out. As a result, urban infill markets can help meet some of these needs to keep product in closer proximity to the final destination.
3. BUILDING CONSTRUCTION IS ADAPTING TO ARTIFICIAL INTELLIGENCE
Labor shortages have forced companies to find alternatives to human capital, and many of them are turning to artificial intelligence and robotics to meet their needs. This is forcing changes in building construction and design, including higher clear height, more cubic storage area, and flatter floors inside the buildings.
Perrier shares, “Businesses need flat floors to accommodate the robotics they’re using in place of human capital.” But, she adds, “We’re also seeing an increased need for higher clear rates, in some cases as much as 40 feet for larger buildings.” To accommodate increased racking height, buyers are looking for space with a greater cubic storage area.
According to R’bibo, the types of technology being implemented inside industrial spaces can vary greatly because it depends on the user. In general, he’s noted that buyers are utilizing customized racking systems and robotics to maximize the overall use of the space.
4. DEMAND FOR INDUSTRIAL SPACE DOESN’T APPEAR TO BE SLOWING
Industrial buyers may wonder when demand will slow, but construction of new industrial space appears poised to continue for several years. The majority of panelists in Southern California and Northern California plan to start at least one new development in the next year. Half of them have plans for more than one new project.
R’bibo says demand won’t slow as long as consumer demand for products through delivery and online platforms holds up. “There are no signs of that slowing,” he adds. The market remains strong and will continue to be strong going forward, as developers keep working at a feverish pitch to bring enough industrial product to the market.
“Now is a great time to be an industrial broker,” quips Perrier. With compression in cap rates and increases in land value and rent, Perrier has seen tremendous opportunities in the market. The only threats appear to be inflation and rising interest rates. Still, she’s quick to point out, “next year could be even better.”