Only A Macro Economic Event Could Significantly Impact Industrial

At this point, it would likely take a macro economic event to impact the tight industrial market in Southern California. Last month, research from JLL reported that more than 65 million square feet of industrial leases will roll over in the region in the next three years, with class-A and class-B space making up a majority of the space. While the mass of lease expirations will offer some relief to the severely tight market, it won’t have much of an impact on the vacancy rate.

“I think that it would take a much larger or broader economic change to impact the rent trajectory or vacancy rate in a dramatic way in this market,” Barry Hill, EVP at JLL, tells GlobeSt.com. “For the infill markets, even in 2009 and 2010, true vacancy only got up to 6%. This is still a tight market, and this is not going to completely loosen up the market or take the vacancy from 2% to 4%.”

The increase in industrial lease renewals won’t impact the market because it isn’t bringing new supply to the market. Rather, it will just allow tenants to mix up, but demand will still remain higher than the current supply—which is driving the record low vacancy and rising rents. “Just having leases roll doesn’t mean that tenants are going to move out,” says Hill. “They will either renew or move into the right facility.”

In the current market, most industrial tenants renew and stay put, however, with more renewals and therefore more options, renewals might be down for the next three years. “In this window of time, you’ll see a few less renewals and a few more relocations and right sizing because tenants will have a few more opportunities to do that,” explains Hill. It is just a little more freeing up of space, and it is good if you are a tenant or an owner or developer to know that it is happening and know how to leverage it.”

Hill reminds that the increase in lease renewals isn’t significant of a market trend or any fluctuations in industrial leasing demand. “With the random nature of leases, you will see more leases rolling than the norm,” he says. “This is one of those pockets of time, but it isn’t tied to a particular trend.”