Industrial Cap-Rates Have Room to Drop

While the industrial landscape in Los Angeles is dynamic, the Mid Counties market is showing no signs of slowing down. According to a recent report from Colliers International, the Mid Counties market is going on its seven consecutive quarter of sub 1% vacancy rate. As a result of the incredible tenant demand, investors are eager to pick up a space in the market and they are willing to pay. Cap rates for some properties have fallen below a 4% cap rate. Colliers's Chris Sheehan says that there is still more room for cap rates to compress.

“I don't see a near-term floor in cap rates. If you have something right down the middle that is class-A, single tenant or two tenants, or big box, it is going to be heavily competitive, even if it is vacant,” Sheehan, an EVP at Colliers International, tells GlobeSt.com. “Lease rates are moving so fast and vacancy is so low and things are still getting absorbed, so I think that cap rates have room to come down. I doubt that they can get to 2% or even 3%, but sub 4% was thought to be achievable, but it has happened.”

Few properties trade hands in the Mid Counties market, and when there are properties up for sale, they generate tremendous competition, driving pricing up. “Almost all spaces are being marketed,” says Sheehan. “Sales are a little different than the leasing market because there are so few opportunities. The lease market is really tight, but the sale market is almost non-existent. If you can find a willing seller, there are plenty of comps at all-time highs. If you have a motivated buyer, you can provide an off-market seller a deal that they would be willing to look at. Still, there aren't a lot of off-market deals happening.”

Industrial users are also being priced out of the market. Typically, industrial users can pay more for an asset than an investor, but with such high competition for properties—and few available—investors are staying competitive. “Because cap rates are so low and lease rates are so high, investors can out compete and out maneuver users, which is a relatively new phenomenon to the market,” says Sheehan.

Prices for industrial properties in the Mid Counties market have hit $200 per square foot, and Sheehan says that next quarter, we should expect more records to break. “Now, we are talking about brand new buildings trading hands for $200 per square foot, which again, wasn't thought to be achievable, but it has been a couple of times,” says Sheehan. “There are a couple of big deals happening in the market that are going to have people shaking their heads.”

While the industrial landscape in Los Angeles is dynamic, the Mid Counties market is showing no signs of slowing down. According to a recent report from Colliers International, the Mid Counties market is going on its seven consecutive quarter of sub 1% vacancy rate. As a result of the incredible tenant demand, investors are eager to pick up a space in the market and they are willing to pay. Cap rates for some properties have fallen below a 4% cap rate. Colliers's Chris Sheehan says that there is still more room for cap rates to compress.

“I don't see a near-term floor in cap rates. If you have something right down the middle that is class-A, single tenant or two tenants, or big box, it is going to be heavily competitive, even if it is vacant,” Sheehan, an EVP at Colliers International, tells GlobeSt.com. “Lease rates are moving so fast and vacancy is so low and things are still getting absorbed, so I think that cap rates have room to come down. I doubt that they can get to 2% or even 3%, but sub 4% was thought to be achievable, but it has happened.”

Few properties trade hands in the Mid Counties market, and when there are properties up for sale, they generate tremendous competition, driving pricing up. “Almost all spaces are being marketed,” says Sheehan. “Sales are a little different than the leasing market because there are so few opportunities. The lease market is really tight, but the sale market is almost non-existent. If you can find a willing seller, there are plenty of comps at all-time highs. If you have a motivated buyer, you can provide an off-market seller a deal that they would be willing to look at. Still, there aren't a lot of off-market deals happening.”

Industrial users are also being priced out of the market. Typically, industrial users can pay more for an asset than an investor, but with such high competition for properties—and few available—investors are staying competitive. “Because cap rates are so low and lease rates are so high, investors can out compete and out maneuver users, which is a relatively new phenomenon to the market,” says Sheehan.

Prices for industrial properties in the Mid Counties market have hit $200 per square foot, and Sheehan says that next quarter, we should expect more records to break. “Now, we are talking about brand new buildings trading hands for $200 per square foot, which again, wasn't thought to be achievable, but it has been a couple of times,” says Sheehan. “There are a couple of big deals happening in the market that are going to have people shaking their heads.”