The industrial supply in Los Angeles is only getting tighter, and for tenants that is going to mean higher rents and even more challenges securing space in 2019. According to the latest market report from Newmark Knight Frank, the Los Angeles industrial vacancy rates was 1.1% in the fourth quarter, and while there is some new construction activity, the absorption rate is on par with new supply. In fact, new product built in the last eight years drove the absorption activity in 2018.

“Educating tenants as to how tight market conditions are remains one of the toughest jobs we have right now,” John McMillan, vice chairman at Newmark Knight Frank, tells GlobeSt.com. “Many leases that are rolling were transacted from 2009 to 2013 before the market really took off.  Back then tenants might have had 10 to 20 options or more to choose from, depending on the size of the requirement and geographic region they were looking in. Now they might have just a handful at most.”

As a result of the limited supply, tenants are signing longer lease terms. In 2018, the average lease term was 79 months, compared to 69 months in 2017 and 55 months in 2015. Tenants are also starting the hunt for space early, while landlords are focusing on credit and lease term. “Tenants are also exploring the market farther in advance of their lease rollover than ever before—certainly before their option window opens/closes, if they even have one,” says McMillan. “If they do it is usually nine to 12 months prior to their lease expiration. Smart tenants, and brokers, will start exploring the market 12 to 18 months in advance, at least for requirements over 50,000 square feet.”

Most opportunities are found when existing tenants with expiring leases are slow to start the negotiation process, leaving room for another tenant to swoop in. “There are plenty of examples of tenants not exercising their options, or forgetting about them, then having their space leased out from under them by another tenant who's more educated on current market conditions,” adds McMillan. “In many cases the tenant coming in is willing to wait six to sometimes even 12 months to get to the space, because they've explored the market well enough to know that is the best choice they're going to have.”

Los Angeles isn't the only market experiencing a dearth of industrial product. Available space is limited throughout Southern California. For tenants looking in the tight market, there is really no place to go. “It's tight everywhere in Southern California, although the Inland Empire at least has some land that can be developed,” says McMillan.

This year, McMillan expects the same challenges—and strong activity and demand. “We are still very bullish,” he says. “Who knows if it will be as frenzied as the period from 2014 to 2018, but we still expect solid activity and rent growth.  If the first week of January is any indication, it's going to be a very good year.”