Where Can Industrial Go From Here?

LOS ANGELES—Industrial vacancy rates are hitting rock bottom. A fourth quarter 2016 from Newmark Grubb Knight Frank showed that vacancy rates were lower than 1% at the close of the year with net absorption of nearly 4 million square feet total in 2016. As a result, landlords have total control in the market, with rents up 12.3% year over year and up $0.01 per square foot higher than the previous cycle peak. With the market this tight, where is industrial to go from here? We sat down with John McMillan, executive managing director at Newmark Grubb Knight Frank for and exclusive interview to discuss the market and where it is headed in 2017.

GlobeSt.com: The industrial market had a strong Q4. What is continuing to drive this strong performance in Los Angeles?

John McMillan: Los Angeles County has roughly one billion square feet of industrial product. Because this is such a large and diverse market there are a multitude of factors that drive the market. Some of these factors include a strong labor force, the continuing influx of e-commerce, and the largest combined ports in the United States where annual T.E.U. traffic was up 3.4% in 2016 (this percentage includes loaded containers only) from 2015.

GlobeSt.com: With vacancy rates at near 0%, how do you expect 2017 to perform?

John McMillan: Assuming there are no curveballs coming from the global economy, we are expecting more of the same strong industrial performance in 2017.  If the first couple of weeks in January are any indication, we will continue to see rates rise, and markets get even tighter this year, as impossible as that may seem.

GlobeSt.com: When vacancy rates fall this low, what is the downside, if any? Is the market affected by the lack of available space?

McMillan: The downside is limited to the tenant/buyer side, as pricing will continue to skyrocket for industrial ownership. Companies that absolutely have to be near the ports will figure out how to make their occupancy work. Other users concerned about rising rents and/or needing to expand that don't have to be proximate to the ports may choose to relocate.  Some will relocate to outlying areas such as the Inland Empire and others will move out of state. Ultimately, we need the cities in LA County with large industrial bases to promote more redevelopment, as our industrial base is aging and becoming more and more functionally obsolete.

GlobeSt.com: What types of companies are still managing to find space in the inland L.A. markets?

McMillan: Los Angeles is home to the most diverse industrial market in the country.  You name it, we have it: third party logistics firms, e-commerce, import/export, food, clothing, furniture, and far more manufacturing than most people realize. Of those, the types of companies that are finding space are the ones hiring a well-qualified industrial broker who gets them into the market well before their lease expires. It is critical to have plenty of time to hunt for suitable options, many of which never hit the market.

LOS ANGELES—Industrial vacancy rates are hitting rock bottom. A fourth quarter 2016 from Newmark Grubb Knight Frank showed that vacancy rates were lower than 1% at the close of the year with net absorption of nearly 4 million square feet total in 2016. As a result, landlords have total control in the market, with rents up 12.3% year over year and up $0.01 per square foot higher than the previous cycle peak. With the market this tight, where is industrial to go from here? We sat down with John McMillan, executive managing director at Newmark Grubb Knight Frank for and exclusive interview to discuss the market and where it is headed in 2017.

GlobeSt.com: The industrial market had a strong Q4. What is continuing to drive this strong performance in Los Angeles?

John McMillan: Los Angeles County has roughly one billion square feet of industrial product. Because this is such a large and diverse market there are a multitude of factors that drive the market. Some of these factors include a strong labor force, the continuing influx of e-commerce, and the largest combined ports in the United States where annual T.E.U. traffic was up 3.4% in 2016 (this percentage includes loaded containers only) from 2015.

GlobeSt.com: With vacancy rates at near 0%, how do you expect 2017 to perform?

John McMillan: Assuming there are no curveballs coming from the global economy, we are expecting more of the same strong industrial performance in 2017.  If the first couple of weeks in January are any indication, we will continue to see rates rise, and markets get even tighter this year, as impossible as that may seem.

GlobeSt.com: When vacancy rates fall this low, what is the downside, if any? Is the market affected by the lack of available space?

McMillan: The downside is limited to the tenant/buyer side, as pricing will continue to skyrocket for industrial ownership. Companies that absolutely have to be near the ports will figure out how to make their occupancy work. Other users concerned about rising rents and/or needing to expand that don't have to be proximate to the ports may choose to relocate.  Some will relocate to outlying areas such as the Inland Empire and others will move out of state. Ultimately, we need the cities in LA County with large industrial bases to promote more redevelopment, as our industrial base is aging and becoming more and more functionally obsolete.

GlobeSt.com: What types of companies are still managing to find space in the inland L.A. markets?

McMillan: Los Angeles is home to the most diverse industrial market in the country.  You name it, we have it: third party logistics firms, e-commerce, import/export, food, clothing, furniture, and far more manufacturing than most people realize. Of those, the types of companies that are finding space are the ones hiring a well-qualified industrial broker who gets them into the market well before their lease expires. It is critical to have plenty of time to hunt for suitable options, many of which never hit the market.