Spec Industrial Builds Holdout For Higher Rates

Andrew Berk Q&A

The industrial market in Los Angeles is rough. With a sub 2% vacancy rate, the market has far greater demand than supply to accommodate it, and new projects are being filled faster than they can come to market. As a result, some developers of speculative industrial projects are waiting to sign leases with prospective tenants in anticipation of rising rental rates, according to Andrew Berk, a market expert and principal at Avision Young, tells GlobeSt.com. Berk, who was recently promoted from VP at the company, sat down with us for an exclusive interview to talk about he challenging market, how tenants are finding space and how he expects the market to perform this year.

GlobeSt.com: Can you provide an overview of the Los Angeles County industrial market?

Andrew Berk: With just over 900 million square feet of industrial inventory in L.A. County, this market continues to shine as one of the largest and strongest markets in the Americas. Industrial product is evolving and reinventing itself as it shifts from classic post war 50s and 60s boxes with relatively low clear height to conversions and new development offering flex and creative open work spaces with prices to match the highest and best use assets. These top of the line, well-located facilities with amenities are seeing a price-per-square-foot sales in the mid- to upper- $100s. Access to massive population/transportation centers coupled with access to talent/labor both for employment and for major clients have made this a C-suite driven market.

GlobeSt.com: With the market so tight, how are larger users finding space?

Berk: With an approximately 2% industrial vacancy rate, larger occupiers that are seeking traditional distribution and warehouse space are consistently having challenges identifying a new space. This is a tight market, and with un-priced speculative inventory that is waiting for rental rates to climb even higher before signing a new tenant, it makes for a challenging and competitive site selection process.

GlobeSt.com: What are the most notable developments right now that can help relieve the supply shortage?

Berk: Users are touring other urban infill areas such as Xebec’s new 350,000-square-foot project in Vernon or Clarion’s newer 1 million-square-foot Brickyard project in Compton. Currently, two significant LA area projects under construction with anticipated completion in the second quarter this year are 20333 Normandie Ave. in Torrance which is a 513,000-square-foot distribution building, and Goodman Logistics Center, a Class A distribution building totaling 506,000-square-feet in Santa Fe Springs. Overall, the industrial sector continues to be the market darling alongside multifamily, both largely driven by eCommerce and changing demographics tastes.

GlobeSt.com: What markets in particular are of interest right now and why?

Berk: Mid-range to smaller occupiers are appreciative of slightly lower drayage costs and ease of being close enough to what continues to be the largest port in the U.S. at LA-Long Beach while being able to service their customers throughout Southern California. With that said, the mid-counties area and other easily accessible submarkets of the Vernon-Commerce and Carson markets tend to get the first look. Larger tenants seeking 500,000 square feet and up are almost exclusively looking to the Inland Empire for options.  Both investors (foreign and domestic) and occupiers continue to find great comfort and confidence in what has become a recognized and true world-class market here in the Los Angeles region.

GlobeSt.com: What can we expect to see on the industrial investment front over the next 12 months or so?

Berk: In the next 12 months I think we are going to see cap rate compression fighting reality, and some testing of nerves of steel. Returns on investment will fight with the inevitability of higher interest rates, higher T-Bill rates and the slow rate of inflation. I think we will see a steady rise on all those factors concurrently as the Federal administration will try to compress market realities while at the helm. It is a great time to be selling so long as folks can find the uplegs or highest and best use opportunities to place capital, including refinances.