Industrial Prices Up Nearly 70% in 5 Years

Industrial prices have reached record heights. According to new research from JLL, the average industrial price in Los Angeles County is $157.43 per square foot, an increase of 69/2% since 2013 and an increase of 17.34% year-over-over. More commonly, however, properties are trading upwards of $300 per square foot in the Los Angeles proper market. The pricing has yet to deter buyers, however, especially institutional players who are willing to pay top-dollar for quality assets in Los Angeles. We sat down with Joe Dimola, VP at JLL, to talk about the price increases and how it is impacting the investment market.

GlobeSt.com: What is driving industrial rats to historical highs?

Joe Dimola: On the supply side, there really is no inventory available. We can’t build any more industrial; there is no land left. So the fact that there is also no new supply coming online and a lack of supply has driven prices up. On the demand side, there is still really strong demand from users and buyers, and that could be due to the fact that the local economy is strong, unemployment is low and businesses are doing well and growing. It is also due to the ecommerce phenomenon. Now, 20% of all new leases are ecommerce related, so there is a new use in these buildings for the first time ever.

GlobeSt.com: Has the pricing made it challenging for buyers to find opportunities or transact in the market?

Dimola: It is extremely challenging. Typically, the sellers are the ones that are holding the negotiating power in these deals. There is a qualified buyer for every building on the market for sale, so it has been very difficult for buyers to find properties to acquire. So, it has been difficult for buyers to get their head around where pricing is, because a lot of the process that buyers are paying are based on speculation of where rates are going to go rather than looking at lease comparables. There aren’t many lease comparables that are justifying the prices that these investors are paying. They are taking a leap of faith based on the fundamentals, and that is why they are becoming more aggressive in acquisitions. As a result, cap rates have compressed and values have gone up.

GlobeSt.com: How are buyers finding opportunities in this market?

Dimola: There are a lot of off market deals happening, and sellers have been fine with that as long as they are hitting their numbers. It has become extremely difficult as a buyer or a tenant in the market. On the tenant side, we are coaching tenants to look into their leases 18 months to 24 months before the lease expiring so that they can secure a renewal rather than being in a bad situation.

GlobeSt.com: Have the prices deterred investment sales activity or sales volumes at all?

Dimola: Tenants have still been paying top rates, and we have not seen them back off just yet. It will be interesting when we do see them do that because then we will know that the increase in the rents is making a substantial threat to their expenses. On the buyer side, however, investors are walking away from deals because they aren’t comfortable with a 3.5% cap rate. It is too tight for them. Some other investors, however, like pension funds and REITs, have gotten super aggressive and will pay a 3.5% cap rate. A lot of investors are starting to walk from it.

GlobeSt.com: Where are prices heading?

Dimola: We don’t see it slowing down any time soon. Prices will definitely continue to increase throughout the year, but interest rates increasing will slow the climb a bit. I think we are still going to be going up because there is really no supply, and we still think that buyer demand is going to be strong.