What Sectors Are Really Driving Industrial Tenant Demand?

Ecommerce gets the credit for driving Southern California’s robust industrial market, but the tenant roster is actually incredibly diverse. Food and beverage, third party logistics, packaging and manufacturing users are creating a diverse industrial market in Southern California, according to research from JLL. That isn’t to say that ecommerce and warehouse users aren’t an important element in the market. Los Angeles has long been home to a diverse roster of tenants because of the ports, but warehouse and ecommerce users are now playing a more dominant role than ever before.

“Los Angeles has always been one of the most diverse industrial markets in the United States due to many factors, such as its proximity to the ports of L.A. and Long Beach, strong labor pool, and the influx of ecommerce,” Joe Dimola, VP at JLL, tells GlobeSt.com “Major user industries driving industrial leasing demand are 3PL, food, import/export, furniture, apparel, and manufacturing. However, for the first time ever historically, these warehouse and distribution buildings are being used differently than they have in the past with the growth of ecommerce. The ecommerce phenomenon is very real, and it will continue to be a major player as online sales crush brick-and-mortar retail. Ecommerce user demand is highest for geographically well-located, class-A efficient buildings.”

There is a challenge in accommodating this diversity: aging product. Much of the industrial product in Los Angeles was built decades ago when ecommerce and warehousing space was in less demand. “Most of Los Angeles’ 1 billion square feet of industrial product is older and considered functionally obsolete,” explains Dimola. “Highest demand is for newer, more modern product with specific building features. This has caused industrial land to become so valuable because you can develop a brand new building, lease it for an all-time high rent and have the highest demand from a multitude of very strong credit tenants. More often than not, new construction is pre-leasing. If not, it is leasing very quickly. Additionally, the high demand and high rents for class-A space has created tremendous rent growth opportunity for class-B space due to the market’s limited availability and overall tightness.”

As a result, tenants are moving to alternative markets, making all of Los Angeles’ industrial market robust. “Due to a lack of available inventory, tenants typically must expand their geographical search parameters to find alternative space,” adds Dimola. “We are seeing more tenant migration across the South Bay, Mid-Counties, Central LA, and San Gabriel Valley sub-markets since tenants can’t find viable options in their respective locations. 3PL companies continue to have the strongest demand in the South Bay market where they are closest to the ports since drayage and transportation costs significantly outweigh rent.”

When product is developed in Los Angeles, much of it is focused on fulfilling the strong demand for ecommerce and warehousing space. For that reason, these demand segments get much of the attention. “Nearly all new development in Los Angeles is for warehouse and distribution uses, not manufacturing,” says Dimola. “Warehouse and distribution uses are not as impactful on a building as manufacturing and they serve as a clean use that is most strongly demanded from the largest pool of tenants. The market has become so competitive that Landlords have become extremely selective on tenant creditworthiness, simply passing on marginal credit tenants.”

Another reason that ecommerce users get the headlines is because they are the most aggressive in looking for space and are willing to pay a premium to find it. “The tenant groups most aggressive in looking for space and paying a premium for quality are ecommerce last mile users and warehouse/distribution users in the South Bay,” adds Dimola. “In the entire L.A. Basin, the highest rent growth is in the South Bay, where we’ve seen nearly 54% rent growth in average asking rents since 2014. Ecommerce users are focused on geographically well located, class-A very efficient buildings for their distribution and they will pay up for it.”