Can the Industrial Vacancy Rate Get Any Lower?

Los Angeles has the lowest industrial vacancy rate in Southern California at 2.2%, according to the first quarter report from NAI Capital. We have heard about the record-low vacancy rate—and subsequently record-high rental rates—in Los Angeles for the last several quarters, but what does this low of a vacancy rate really mean? At 2.2%, the industrial market is nearly fully occupied and vacancy rates likely can’t get any lower in the market—because a 0% overall vacancy rate is unlikely. Los Angeles isn’t alone. Orange County is in second place with a 2.3% vacancy rate and Ventura’s vacancy rate fell 50 basis points to 2.6% To find out more about how this supply shortage is impacting leasing activity, we sat down with Chris Jackson, executive managing director at NAI Capital.

GlobeSt.com: The 1Q18 report shows that vacancy rates have hit 2.2% throughout L.A. What does a 2.2% vacancy rate look like in the market? Can vacancy rates get any lower, or is this basically full occupancy?

Chris Jackson: I don’t think that is a possibility. As of right now, in certain size ranges, that is basically full. There are more tenants in the 50,000 square foot requirement, so that size range is the tightest.

GlobeSt.com: How has this dearth of supply impacted the market?

Jackson: The issue is when tenants leases are coming up on renewals, and they want to renew at a certain rate with concession. We have to tell them that they are way below market and we aren’t giving them any concessions. This is a landlord market now, and you can have rents at the peak, and there is nothing that tenants can do because they don’t have the option of going out and getting another space.

GlobeSt.com: What rental increases should tenants renegotiating leases today expect?

Jackson: I’ll give you an example. I am working with a client now that has a five-year lease coming due and they are looking at a 12% increase. There are only six properties in all of the San Fernando Valley in that size range, all at rents over $1 per square foot. This is a manufacturing user, but this is really happening with tenants across the board. Any tenant in the marketplace that is looking to renew or expand, is experiencing this.

GlobeSt.com: Have you had pushback from tenants on rents, or have you had tenants that didn’t renew as a result of rising rents?

Jackson: No, because most of the tenants that are in the spaces now are doing well in this economy, and they have been able to pay the increased rents. We have had people threaten to leave, but when you come back and show them where the market is, they sign the lease without issue.

GlobeSt.com: Ventura County saw a 50 basis point drop in vacancy rates this quarter. Is the industrial market these expanding as a result of the limited supply in L.A.?

Jackson: The lease rates there are a little lower, but we aren’t seeing people that are migrating to Ventura from Los Angeles. We haven’t seen that, but the market is tighter because there are some companies that have expanded in the Ventura marketplace. That hasn’t been driven by migration. The people that are up there want to be there.

GlobeSt.com: We are at near full occupancy and record rental rates. Where is the market heading from here?

Jackson: I think that rates in the next three years will come down, but it is tough to say. In the last four or five years, lease rates have really climbed to an all-time high, and I don’t know how much higher they are going to go. If we have a slow down in the economy over the next few years, you’ll see more space come online and that will bring lease rates down a little bit.