Expect an Industrial Supply Shortage in SoCal Following the Pandemic

Industrial absorption is expected to soar following the pandemic as a result of increased online shopping. According to a report from CBRE, industrial absorption will hit 333 million square feet nationally by 2022, more than triple the previous forecast. The demand will also catalyze rent growth of 5.7% annually. In the biggest industrial markets, like Southern California, increased demand and absorption could also spur a supply shortage.

“Ecommerce-related industries will be the main drivers of industrial absorption in the foreseeable future, including consumer goods, cold storage requirements as well as some manufacturing,” Kurt Strasmann, executive managing director at CBRE, tells GlobeSt.com. “Ecommerce is the driver on multiple levels. The emergence of all sectors of society buying online has accelerated the growth of online shopping behaviors on a much boarder basis than in the past. We are paying particular focus on cold Storage, which is just beginning to take hold, with a steady increase in demand likely as we move forward.”

In Southern California, rent growth has paused during the pandemic, but Strasmann anticipates strong rent growth through the recovery as a result of this surge in demand. “Although rent growth right now is for the most part on pause after years of tremendous increases, once we get through the COVID-19 pandemic, we anticipate continued strong rental growth across Southern California, with Class A infill areas likely to see the biggest boost,” he says.

However, industrial supply shortages will also plague the market, and industrial rents will also see upward pressure from supply constraints. “Remember, Southern California already has one of the lowest vacancy rates in the U.S.  There are barriers to entry in the infill markets, so this will always be the case and add to the supply-demand imbalance, especially for class-A space,” Strasmann says.

For the remainder of 2020, industrial performance will be flat if not slightly negative before switching back into growth mode. “We expect rent growth again in 2021, and asset valuations have not moved much,” says Strasmann. “On the whole, industrial values have fared well during this period but it is necessary to classify industrial product into three areas:  Class A will continue to exceed expectations.  Class B product will have a few challenges while Class C and small multi-tenant space is likely to struggle.  The smaller multi-tenant space has been experiencing problems due to COVID-19 as the occupants of these spaces typically don’t have the financial strength to survive a longer downturn.  We expect that to affect rents and values in that segment.”