The Los Angeles industrial market has returned to negative absorption. In Q2, the amount totaled -1.5 million square feet, according to a Savills market report.
Warehouse rents declined as vacancy increased by 50 basis points (bps) from the previous quarter to a historic high of 7%, representing a 130-basis-point increase compared to the 5.7% vacancy rate from a year earlier.
Savills said this was largely due to a growing inventory of available spaces under 200,000 square feet. With reduced occupier activity and increasing vacancy, overall asking rental rates decreased to $1.37 per square foot, marking a 0.7% decrease from the previous quarter and a 6.6% decline from the same time last year.
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The report stated that these trends are likely to persist through the end of this year.
Despite inflationary pressure and historically high vacancy, Savills described the Los Angeles industrial market as resilient. Additionally, its proximity to the Port of Los Angeles and Long Beach, as well as limited new product pouring into the market, supports this long-term outlook.
“LA’s resiliency is being maintained by a mix of recovering trade (port volume rebounding), constrained supply since new construction has slowed, and the region’s critical role as a last-mile and import distribution hub as tenant demand continues to stabilize,” Savills’ Research Manager Caitlin Barrozo told GlobeSt.com.
Inland Empire Lacks New Construction
Meanwhile, shifting to the Inland Empire is where Barrozo said she found the most surprising trend.
“The Inland Empire has many different variables that influence industrial market conditions,” she said.
“The biggest hurdle is the lack of new construction, as there is approximately 6.9 MSF (million square feet) under construction. This is an 82.5% decrease from the 2023 peak of 39.2 MSF.
The limited developments, combined with the uncertain impact of tariffs and increasing vacancy rates, have caused occupiers to pause long-term commitments, she said.
“Market conditions will have minimal change until the dust settles on these variables,” according to Barrozo. “The Los Angeles industrial market mirrors these same conditions as the Inland Empire, but it is in a stronger position because construction has stayed marginally consistent, and it is near the Los Angeles/Long Beach ports.”
Savills reported that after two straight quarters of declining vacancy, the Inland Empire’s rate fell by 20 basis points (bps) in the second quarter to 8.7%, marking a 40-bps decrease from the same period last year. Second quarter absorption totaled -621,773 square feet (sf).
Renewals led the market’s leasing transactions in Q2 with four of the top 10 lease transactions. Burlington Coat Factory's renewal of its third location in the Inland Empire was the largest.
Asking rental rates in the Inland Empire have declined for eight consecutive quarters, signaling a broader market correction.
In Q2, they fell to $1.09 per square foot (psf) per month, representing a 6.7% decline from the prior quarter and a 10.5% drop year-over-year.
“Vacancy dictates asking rental rates; therefore, until vacancy stops increasing and reverts to a downward trend, declining rents will continue,” Barrozo said.
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