Downtown is one of the markets included in the Central Los Angeles region.

LOS ANGELES—The central Los Angeles region is one of the tightest industrial markets in the nation, according to Lee & Associates‘ 2Q14 national industrial report, released exclusively to earlier this week. While reviewing the national market, the report also takes a micro look at the central L.A. region, which includes downtown, Vernon, Commerce and the mid-counties, to reveal the strengths and challenges in the market.

One of those challenges is limited supply and high demand. Although Los Angeles is ranked one of the nation’s top industrial markets, the limited supply is hindering absorption rates in the market, which had been positive for the past 12 quarters. It is a problem that is not easily solved, considering that there is little available land for development. The supply constraint has also put upward pressure on land prices, making construction costs unrealistic for a return on traditional industrial product. For that reason, some developers are finding alternative, non-industrial uses—like conversion to office or multifamily—for older industrial product that has been over priced for industrial users. This debacle has brought industrial development to a near standstill in these markets.

However, the overall market remains strong. The vacancy rate is at 3.5%, and rental rates are rising moderately while sale prices are rising dramatically. The strong demand in these submarkets is leading to increased rents and sales prices for outdated properties as well, and landlord’s are being a little less flexible when it comes to tenant improvements and concessions. However, there is good news for those industrial buyers successful in securing a property, because industrial properties can secure SBA loans with full amortization in the range of 5% and at 90% of the appraised value.

A lot of this demand is driven by the market’s close proximity to the Los Angeles and Long Beach Ports, and for that reason, demand isn’t likely to subside. Lee forecasts similar vacancy rates, in the 3.5% to 4% range, for the remainder of the year, with absorption dwindling as supply becomes more of a problem. Constrained supply down the road will mean that industrial users need to allot more time to find and secure a new facility.