Is It Too Late to Build More Industrial?

Second quarter market reports are in, and industrial continues on a hot streak. According to the CBRE report, the Los Angeles vacancy is at 1.1% for the quarter, and this is the 11^th consecutive quarter that the vacancy rate has remained below 2%. Lease rates rose $0.78 for the quarter, a 26% increase in rates since Q3 2014. With all of this demand, construction still hasn't picked up, likely due, in part, to land constraints. However, Jamil Harkness, a senior research analyst at CBRE, says that developers are also cautious about getting caught in a cycle change. We sat down with Harkness and Joe Cesta, a managing director at CBRE, for an exclusive interview to talk more about the market dynamics.

GlobeSt.com: This has been the same story for so long with industrial. Are there any relevant changes that you see quarter-to-quarter over the last year? 

Jamil Harkness: Robust market fundamentals, due to the emergence of the e-commerce movement, have kept demand strong and have bolstered development activity.  With these factors at play, the industrial landscape is very attractive as users/tenants continue to gravitate to big-box industrial and light industrial product.

GlobeSt.com: As the supply tightens, will we see construction pick up, or is there simply not enough land in L.A. to accommodate the demand? 

Harkness: Los Angeles is an infill market as well as supply constrained. which is why we are seeing more construction in the Inland Empire.  We have a lot of pre-commits but developers are cautious as to not overbuild the market or get caught in a cycle change.  As regulations on development and industrial become more stringent this could begin to stifle future development. With big-box industrial product more attractive, the land to develop these state-of-the-art buildings can only be found in the Inland Empire.  There are small pockets of development throughout LA, but not a significant amount that would cause availability and vacancy to increase significantly.

GlobeSt.com: How have lease rates consistently increased with demand? 

Cesta: In the Inland Empire we market most vacant assets with a TBD lease rate because the market is moving quickly.  On a broader scale, smaller product is increasing at a faster rate than larger big box rates.  Lease rates have continued to grow with demand as a lot of the new delivered product is commanding a premium, helping to push rates higher.  In addition, second-generation product lease rates have increased incrementally, at a slightly slower rate than its newer counterpart.

GlobeSt.com: Obviously, this is a great market for landlords. How are users responding to the market conditions? 

Cesta: Users are paying the terms in order to be located in the Inland Empire.  Typically, real estate costs are only 9 percent of operational expenses; the bigger decision-making factor for tenants is availability of labor and drayage rates.

Second quarter market reports are in, and industrial continues on a hot streak. According to the CBRE report, the Los Angeles vacancy is at 1.1% for the quarter, and this is the 11^th consecutive quarter that the vacancy rate has remained below 2%. Lease rates rose $0.78 for the quarter, a 26% increase in rates since Q3 2014. With all of this demand, construction still hasn't picked up, likely due, in part, to land constraints. However, Jamil Harkness, a senior research analyst at CBRE, says that developers are also cautious about getting caught in a cycle change. We sat down with Harkness and Joe Cesta, a managing director at CBRE, for an exclusive interview to talk more about the market dynamics.

GlobeSt.com: This has been the same story for so long with industrial. Are there any relevant changes that you see quarter-to-quarter over the last year? 

Jamil Harkness: Robust market fundamentals, due to the emergence of the e-commerce movement, have kept demand strong and have bolstered development activity.  With these factors at play, the industrial landscape is very attractive as users/tenants continue to gravitate to big-box industrial and light industrial product.

GlobeSt.com: As the supply tightens, will we see construction pick up, or is there simply not enough land in L.A. to accommodate the demand? 

Harkness: Los Angeles is an infill market as well as supply constrained. which is why we are seeing more construction in the Inland Empire.  We have a lot of pre-commits but developers are cautious as to not overbuild the market or get caught in a cycle change.  As regulations on development and industrial become more stringent this could begin to stifle future development. With big-box industrial product more attractive, the land to develop these state-of-the-art buildings can only be found in the Inland Empire.  There are small pockets of development throughout LA, but not a significant amount that would cause availability and vacancy to increase significantly.

GlobeSt.com: How have lease rates consistently increased with demand? 

Cesta: In the Inland Empire we market most vacant assets with a TBD lease rate because the market is moving quickly.  On a broader scale, smaller product is increasing at a faster rate than larger big box rates.  Lease rates have continued to grow with demand as a lot of the new delivered product is commanding a premium, helping to push rates higher.  In addition, second-generation product lease rates have increased incrementally, at a slightly slower rate than its newer counterpart.

GlobeSt.com: Obviously, this is a great market for landlords. How are users responding to the market conditions? 

Cesta: Users are paying the terms in order to be located in the Inland Empire.  Typically, real estate costs are only 9 percent of operational expenses; the bigger decision-making factor for tenants is availability of labor and drayage rates.