'Pay To Play': Los Angeles' Industrial Market Keeps Climbing

With vacancy rates that have spent months threatening to scrape 0%, leasing industrial properties in the Los Angeles and Inland Empire markets is more expensive than ever.

Asking rents are up 23.6% year-to-date, according to a third-quarter report from JLL, with the newest and highest-quality properties in some cases drawing $2 per SF or more.

“You have to pay to play if you’re doing business in the greater LA area,” JLL Managing Director Trevor Gale said.

The entire Los Angeles region now sits at or above the $1.50 triple-net mark, a dramatic increase from last year when the area's submarkets crossed the $1 threshold, according to JLL.

In the Inland Empire, JLL found that asking rents grew 19.7% from Q2, putting the average asking rent at $1.58 per SF.

According to JLL, vacancy in greater Los Angeles is 0.8% and 0.6% in the Inland Empire. 

That tight vacancy means that there aren't many new lease deals getting done. With the lack of available space, Gale said lease renewals are almost outperforming new direct lease transactions, though he said factors including the quality of the building influence whether or not tenants are staying put.  

Tenant inquiries have dropped off, but those that are coming in are from credit tenants, said Gale, who covers the central Los Angeles area, including Vernon, South Gate, Huntington Park and Bell Gardens.  

“It’s more quality versus quantity that we’re seeing right now in the marketplace” as far as tenant inquiries, Gale said. 

Savills clocked vacancy in LA at 1.8% and in the Inland Empire at 1.5%, but Savills Research Manager Caitlin Matteson said that is because the firm only tracks buildings over 50K SF. 

Matteson noted that many leases that are coming up for renewals are expiring at a time in the market when their rates are sky-high compared to four or five years ago when they likely signed the lease. 

“But they’re thinking, 'Well, what options do we have?'” Matteson said. "'Because we can't necessarily move because space is limited, and the asking rate is going to be so high.'" 

Matteson said that while she is keeping an eye on how economic headwinds of rising interest rates, inflation and general poor sentiment toward the economy could affect the markets in LA and the Inland Empire, she isn’t expecting a major shift in the white-hot demand for space. 

“The LA and IE markets are so tight that it's going to take a lot longer for us to see any type of change in demand,” Matteson said.

Seeing the supply-and-demand imbalance and the yield potential it brings, developers have big plans for the market.

While Los Angeles’ square footage under construction dropped about 13% to approximately 4.8M SF, the development pipeline in the Inland Empire exploded 60.7% to 35.9M SF, NAI Capital found in a recent industrial market trends report. 

Because of all this new construction, “an increase in the availability of industrial space is taking shape in Southern California’s industrial markets heading into year-end 2022,” according to the report.

Regionwide, 43.7M SF of new, pricey industrial space is under construction, NAI Capital found. 

"Developers have responded to market needs and built space, and now we’re seeing more space come online and yes, it’s pricier, but new construction is pricier," NAI Capital Managing Director, Research J.C. Casillas said.