How Does L.A. Stack Up Against the Inland Empire?

LOS ANGELES—Los Angeles and the Inland Empire continue to be the major dominators of the Southern California industrial market. While they share high demand, record low vacancy rates and ever increasing rental rates, they are two very different markets. To find out how they stack up, the differences and challenges in each market and why investors and tenants are lining up to get into each one, we sat down with market expert Ray Kivett, managing director of investments at American Realty Advisors, for an exclusive interview. Here, he draws comparisons between the two markets and discusses the trends and challenges for each.

GlobeSt.com: The Southern California industrial market is incredibly active. How do the two biggest submarkets in the region—the Inland Empire and the Los Angeles market—compare?

Ray Kivett: The broader Los Angeles market is comprised of two markets:  Los Angeles and the Inland Empire.  The Los Angeles market is comprised of much older and smaller stock with less than 15% of stock being greater than 250,000 square feet while the Inland Empire is comprised of newer, larger stock with 66% of stock currently under construction having clear heights of 36' or more.  While the composition of industrial buildings is different, both are driven by port activity with The L.A. and Long Beach ports comprise more than 40% of total port traffic in the U.S. as well as serving the mega local population.

GlobeSt.com: What is driving demand in both of these markets?

Kivett: Demand in both Los Angeles and the Inland Empire will benefit from continued ecommerce expansion.  Los Angeles offers excellent proximity to the significant local population making it a highly desirable “last mile” market while the Inland Empire offers larger, highly functional space that can accommodate the bulk distribution facilities that form the keystone of ecommerce logistics strategies.

Looking specifically at the Los Angeles market, demand for industrial space in Los Angeles benefits both from activity at the LA and Long Beach Ports as well as the demand created from needing to serve the larger local population.

GlobeSt.com: Is the dearth of supply in Los Angeles hurting the market?

Kivett: Supply in Los Angeles is limited as opportunities to construct new, highly functional industrial space are few and far between in this mature market.  As a result, tenants generally locate in the Los Angeles area for proximity to the ports and/or the local population, not for its quality of product as much of it is older and less functional. Property fundamentals are exceptionally favorable with recent sub-2% vacancy rates not having been seen since the 1980's. This has driven exceptionally strong rent growth.  While developers are trying to take advantage of this highly favorable supply/demand environment the barriers to new supply are significant, limiting development activity.  Developers are getting creative eyeing opportunities to modify older, existing product, sometimes former manufacturing facilities.

GlobeSt.com: What are the benefits of the Inland Empire? What is the draw for industrial users?

Kivett: Compared to the Los Angeles market, the Inland Empire is both the lower cost alternative market and the market where larger, newer, much more functional product can be found. Efficiency is the name of the game in the Inland Empire with tenants generally looking for the most functional space allowing greater throughput and lower operating costs. Tenants choose the Inland Empire for cost, higher functionality product, or some combination. Property fundamentals within the IE are also strong which has seen an exceptional combination of demand and supply this cycle achieving vacancy rates not seen since 1997.  Rent growth has been strong as well.  This has spurred construction activity, a natural response to strong demand and limited space availability.

GlobeSt.com: Are there any major concerns for these two markets?

Kivett: While questions remain regarding the impact of the Panama Canal expansion on port volumes at LA and Long Beach ports, the Los Angeles market has the buffer of its proximity to the surrounding mega local population base and the demand for industrial space generated from serving the local population. The Inland Empire would likely be more impacted by any reduction in port activity resulting from the Panama Canal expansion as it has a higher concentration of regional serving bulk distribution facilities that are tied to port activity.  However, a strong dollar would be expected to somewhat offset a potential shift in L.A. and Long Beach's share of total port activity as a stronger dollar would increase imports increasing port activity in general.

GlobeSt.com: All of this demand has caused some intense competition for investors. How are investors managing to find opportunities and stay competitive in these two markets?

Kivett: Looking at the capital markets, to acquire properties in this competitive market, many investors are willing to take leasing risk through “pre buy” arrangements in which they acquire a property from a developer at a fixed price upon developer's receipt of certificate of occupancy.  This strategy has been predominant in the large, 750,000-square-foot-plus speculative developments that have dominated the Inland Empire East and West.  Given the strong demand form large credit tenants modernizing their national and international logistics strategies, for the most part, the buildings have been leased at above pro forma rates prior to completion, so this has been a winning strategy for investors and developers.

Competition in the infill markets is not much different. Given the extremely low availability, investors and users must make choices such as can we operate/invest in a low clear height infill facility with small truck courts or should we go to the Inland Empire for more modern space with higher drayage costs due to the greater distance from the ports and large population centers. The crown jewel today is the rare modern facility in an infill location.

GlobeSt.com: Ecommerce has been a major driver of these markets. Is it still a huge driver, and how does it continue to drive the need for more industrial space?

Kivett: E-commerce now accounts for more than 8% of total retail volume and is currently increasing at more than 15% a year.  Requirements to accommodate e-commerce users include a space ratio that is three times the size of normal retail operations as a result of increased SKUs being handled at a facility, pick and pack staging areas requiring increased space, and dedicated areas to handle return volumes.  In addition to this increased space need, there are exterior impacts including a demand for space for increased employee parking needs and revised queuing lanes to handle conventional 53' truck trailers and box vans.  These facilities should be located in the most infill locations, allowing goods to arrive from nearby outlying regional facilities and then move quickly out to the consumer via conventional delivery/logistics service providers, independent retailer owned delivery vehicles, and in some cases, Uber drivers.  All of this last mile effort reduces the time between the consumer's online purchase and the arrival of the package in that consumer's hands, all now expected to occur within a matter of hours.

LOS ANGELES—Los Angeles and the Inland Empire continue to be the major dominators of the Southern California industrial market. While they share high demand, record low vacancy rates and ever increasing rental rates, they are two very different markets. To find out how they stack up, the differences and challenges in each market and why investors and tenants are lining up to get into each one, we sat down with market expert Ray Kivett, managing director of investments at American Realty Advisors, for an exclusive interview. Here, he draws comparisons between the two markets and discusses the trends and challenges for each.

GlobeSt.com: The Southern California industrial market is incredibly active. How do the two biggest submarkets in the region—the Inland Empire and the Los Angeles market—compare?

Ray Kivett: The broader Los Angeles market is comprised of two markets:  Los Angeles and the Inland Empire.  The Los Angeles market is comprised of much older and smaller stock with less than 15% of stock being greater than 250,000 square feet while the Inland Empire is comprised of newer, larger stock with 66% of stock currently under construction having clear heights of 36' or more.  While the composition of industrial buildings is different, both are driven by port activity with The L.A. and Long Beach ports comprise more than 40% of total port traffic in the U.S. as well as serving the mega local population.

GlobeSt.com: What is driving demand in both of these markets?

Kivett: Demand in both Los Angeles and the Inland Empire will benefit from continued ecommerce expansion.  Los Angeles offers excellent proximity to the significant local population making it a highly desirable “last mile” market while the Inland Empire offers larger, highly functional space that can accommodate the bulk distribution facilities that form the keystone of ecommerce logistics strategies.

Looking specifically at the Los Angeles market, demand for industrial space in Los Angeles benefits both from activity at the LA and Long Beach Ports as well as the demand created from needing to serve the larger local population.

GlobeSt.com: Is the dearth of supply in Los Angeles hurting the market?

Kivett: Supply in Los Angeles is limited as opportunities to construct new, highly functional industrial space are few and far between in this mature market.  As a result, tenants generally locate in the Los Angeles area for proximity to the ports and/or the local population, not for its quality of product as much of it is older and less functional. Property fundamentals are exceptionally favorable with recent sub-2% vacancy rates not having been seen since the 1980's. This has driven exceptionally strong rent growth.  While developers are trying to take advantage of this highly favorable supply/demand environment the barriers to new supply are significant, limiting development activity.  Developers are getting creative eyeing opportunities to modify older, existing product, sometimes former manufacturing facilities.

GlobeSt.com: What are the benefits of the Inland Empire? What is the draw for industrial users?

Kivett: Compared to the Los Angeles market, the Inland Empire is both the lower cost alternative market and the market where larger, newer, much more functional product can be found. Efficiency is the name of the game in the Inland Empire with tenants generally looking for the most functional space allowing greater throughput and lower operating costs. Tenants choose the Inland Empire for cost, higher functionality product, or some combination. Property fundamentals within the IE are also strong which has seen an exceptional combination of demand and supply this cycle achieving vacancy rates not seen since 1997.  Rent growth has been strong as well.  This has spurred construction activity, a natural response to strong demand and limited space availability.

GlobeSt.com: Are there any major concerns for these two markets?

Kivett: While questions remain regarding the impact of the Panama Canal expansion on port volumes at LA and Long Beach ports, the Los Angeles market has the buffer of its proximity to the surrounding mega local population base and the demand for industrial space generated from serving the local population. The Inland Empire would likely be more impacted by any reduction in port activity resulting from the Panama Canal expansion as it has a higher concentration of regional serving bulk distribution facilities that are tied to port activity.  However, a strong dollar would be expected to somewhat offset a potential shift in L.A. and Long Beach's share of total port activity as a stronger dollar would increase imports increasing port activity in general.

GlobeSt.com: All of this demand has caused some intense competition for investors. How are investors managing to find opportunities and stay competitive in these two markets?

Kivett: Looking at the capital markets, to acquire properties in this competitive market, many investors are willing to take leasing risk through “pre buy” arrangements in which they acquire a property from a developer at a fixed price upon developer's receipt of certificate of occupancy.  This strategy has been predominant in the large, 750,000-square-foot-plus speculative developments that have dominated the Inland Empire East and West.  Given the strong demand form large credit tenants modernizing their national and international logistics strategies, for the most part, the buildings have been leased at above pro forma rates prior to completion, so this has been a winning strategy for investors and developers.

Competition in the infill markets is not much different. Given the extremely low availability, investors and users must make choices such as can we operate/invest in a low clear height infill facility with small truck courts or should we go to the Inland Empire for more modern space with higher drayage costs due to the greater distance from the ports and large population centers. The crown jewel today is the rare modern facility in an infill location.

GlobeSt.com: Ecommerce has been a major driver of these markets. Is it still a huge driver, and how does it continue to drive the need for more industrial space?

Kivett: E-commerce now accounts for more than 8% of total retail volume and is currently increasing at more than 15% a year.  Requirements to accommodate e-commerce users include a space ratio that is three times the size of normal retail operations as a result of increased SKUs being handled at a facility, pick and pack staging areas requiring increased space, and dedicated areas to handle return volumes.  In addition to this increased space need, there are exterior impacts including a demand for space for increased employee parking needs and revised queuing lanes to handle conventional 53' truck trailers and box vans.  These facilities should be located in the most infill locations, allowing goods to arrive from nearby outlying regional facilities and then move quickly out to the consumer via conventional delivery/logistics service providers, independent retailer owned delivery vehicles, and in some cases, Uber drivers.  All of this last mile effort reduces the time between the consumer's online purchase and the arrival of the package in that consumer's hands, all now expected to occur within a matter of hours.