Southern California's industrial market was on fire in 2017, and the high demand meant tight supply in many submarkets. To find out more about how each Southern California submarkets stacked up this year, and what to expect in 2018, we sat down with DAUM's Southern California office leaders. Here, they give us some insight into their market.

GlobeSt.com: How did the industrial sector perform in your market this year?

Chad Jacobson, San Fernando Valley Office: The Los Angeles North (San Fernando Valley, Santa Clarita Valley, and Antelope Valley) industrial market witnessed vacancy rates remaining below 2.0% and available rates at 3.3%, its lowest level since 2005. The market added 10 new buildings representing just over 1.0 million square feet, which is highest amount of new construction since 2007 which saw 1.27 million square feet. Overall demand remains very strong, and although overall activity is lower than previous years, it's a direct result of the lack of available space

Most properties that are priced correctly today are not even hitting the market, and a large portion of for sale properties are often being sold prior to hitting the open market. The extremely tight market has pushed rents up 9.1% year-to-date (up 47% from the low in 2010), and remains at an all-time high. Median sale prices are up 11.1% year-to-date (up 70% from the low in 2012) and remains at an all-time high.

We expected the market to remain very tight this year, as the majority of the market remains, a dense infill market for industrial development. We anticipated a pretty healthy run-up in prices for both rents and sale prices, as tenants/buyers have very little leverage in negotiating on space that comes available and often are competing against multiple tenants/buyers.

Dennis Sandoval, San Gabriel Valley Office: The San Gabriel Valley has been on a positive economic course from the end of 2016 through 2017. In spite of legislation in Sacramento, we've been seeing job growth in all sectors over the past ten months. As we negotiate leases and see that CPI has ticked up to 3% in 2017 from 1.2% in 2016, we are encouraged that business is moving in the right direction.

The challenge we have in the San Gabriel Valley is the tight real estate market. There is a limited inventory of industrial buildings available from 20,000-40,000 square feet and from 100,000-300,000 square feet. These two size ranges have been the most in-demand and hardest requirement to fill. A pent-up demand for these buildings is driving up rental rates and sales prices. Vacancy rate in San Gabriel Valley has hovered around 1% for the past 18 months. This demand and low vacancy factor has put direct upward pressure on lease rates and land prices in particular.

An example of this pent-up demand is the seven-building development project I am marketing for Dedeaux Properties in the City of Industry. This project was designed to fill one of the “holes” in the market. Buildings from 27,000-40,000 square-feet are under construction and not scheduled for completion until Q1 2018. We have already “pre-sold” five of these new buildings. It looks as though we will have all buildings under contract and committed for sale before development is completed.

Kerry Cole, Inland Empire Office: The Inland Empire market continues to be one of the most dynamic markets in the country. The year began with high expectations and the results are well in line with that lofty outlook. The vacancy rate hovers around 3% with gross activity projected to exceed 2016 levels. Strong need from E-Commerce, national retailer and third-party logistics companies continue to drive demand for large blocks of modern, Class A warehouse space of 200,000 to 1,000,000+ square feet, featuring 36'-40' clearance, ESFR sprinklers, expanded truck courts with trailer parking and abundant loading doors. These companies value the large local labor pool, reasonable port access and lower rents that the Inland Empire provides, as well as the state-of-the-art distribution buildings.

Michael Collins, South Bay Office: The South Bay has a vibrant industrial market from the standpoint of ongoing demand from both investors and users. This demand is fueled by several dynamics, such as proximity to the Ports of Los Angeles and Long Beach, proximity to Downtown LA, an excellent transportation network including LAX and several major freeways, and diverse housing. We were pleased to see continuing velocity in the market this year, due to a very strong business climate in both the real estate and financial sectors.

Steve Pearson, Orange County Office: Given all of the election promises in 2016 about tax reductions, some of our clients held off on selling their industrial property until new tax laws were passed. Delays in tax law changes this year continued to dampen sales activity. The dollar volume of Orange County industrial sales and leases has been up in 2017, but the number of transactions has been down. An extremely tight inventory of available properties (2.5% vacancy) has driven prices up to a pre-great recession high as companies that need to maintain and/or grow their business in OC have had to pay higher prices.

David Freitag, Los Angeles Office: The market exceeded my expectations, rates increased and the leasing and sale market remain strong. Rates are at an all-time high. This is product that is for sale and lease. The key to making deals would be a strong knowledge of the market and the ability to respond to an opportunity before it reaches the market.

Michael Foxworthy, Ventura County Office: Year-to-date, the market's performance was slightly off from the previous year, not due to demand but limited supply.

GlobeSt.com: What is your 2018 outlook for the industrial sector in your market?

Chad Jacobson, San Fernando Valley Office: We expect the market to remain extremely tight (vacancy in the 2% range and available in the 3% range), but do expect to see rents and sale prices to begin to flatten out. Instead of double-digit increases, we are expecting increases to be in the 3% to 6% range for the overall market.

With the new Recreational Cannabis law going into effect on Jan. 1, 2018, we expect to see considerable demand for this use throughout the LA North market. Due to the nature of this business moving from illegal to legal and the way it's being regulated by different municipalities, it's created uncertainty on how much of the existing traditional industrial space will now support the Cannabis industry. If it proves to be significant, we could see rents and sale prices for those properties continue to rise at a double-digit pace in 2018.

Tenants who entered into leases 4-6 years ago will be feeling major sticker shock upon renewal or looking for new space. Overall demand should remain solid as the economy continues to grow, but the lack of new product and limited availability will continue to restrict activity in the market.

Dennis Sandoval, San Gabriel Valley Office: The San Gabriel Valley continues to be appealing to industrial users due the overall business-friendly environment, an influx on foreign investment (from China in particular) and the quality of life offered in the surrounding residential communities.

San Gabriel Valley also has an extremely appealing location relative to freeway accessibility. The 605 freeway is a major north/south artery, with the 10, 60, 210 and 57 freeways serving the region truck access in all directions is attractive. This location is a key factor in the growth of the logistics sector in this region. Call them “Fulfillment Centers”, “Distribution Hubs” or “DC Centers,” the strong domestic consumer demand is driving the new shopping paradigm of “on-line” consumers.

In spite of political turbulence over trade policies, this demand for on and off shore consumer products prods the demand for warehouse and distribution buildings throughout the San Gabriel Valley and LA Basin to meet this incredible appetite for home delivered goods. Business optimism, market indicators and trending values seem to be readying us for a solid 2018.

Kerry Cole, Inland Empire Office: While the real estate cycle is growing a bit old, there are few signs of weakness and projections are for another strong year in 2018. Approximately 20,000,000 square feet of industrial product is under construction at this time

Michael Collins, South Bay Office: 2018 should be a continuation of the strong activity experienced last year. In this region, there is the challenge to find land for developers. The tight market continues to push lease rates and sale prices to historic highs. It is a bit surprising to see both users and, particularly, investors pay these rising prices. Of course, the higher pricing results in lower yields or returns on invested capital. Today's market cap rates for industrial properties in the South Bay region are typically in the 4.75% to 5.25% range. Specific returns are primarily based on property age and functionality, tenant credit, lease terms and location.

Steve Pearson, Orange County Office: Given the continued strong stock market, proposed small incremental interest rate increases, proposed new “pro-business” tax changes, and expansions in the tech, biomedical and light manufacturing business that dominate OC's industrial base, we see 2018 as another growth year with more properties changing hands and more companies expanding to take advantage of our great supply of intellectual and financial capital (not to mention our great weather).

David Freitag, Los Angeles Office: I am optimistic that the market will remain strong in the coming year. There is limited inventory, so as a broker you will really need to have tenants or buyers that are responsive, and prepared to provide strong financial statements or preapproval for financing.

Michael Foxworthy, Ventura County Office: While we are late in the economic cycle, we expect that 2018 will continue to be a strong year.

Instant Insights /

'Tight' Is the Theme of 2018 Industrial

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