Industrial Rents Drop In Southern California For First Time Since 2009

Industrial rents in Southern California dipped in the first quarter, marking the first time they have decreased since 2009, according to the latest data from Savills.

The drop is slight, less than 15 cents per SF in both Los Angeles and the Inland Empire, mirroring the size of the slump in 2009, according to Savills Southern California Research Manager Caitlin Barrozo.

It isn't cause for concern, though, given how rapidly the market ran up in the last few years, Barrozo said.

“Everything was increasing at such an astounding rate,” Barrozo said. “Now it's stopped and it's kind of correcting itself.” 

She said these conditions are more of a rebalancing of the markets from an unsustainable early pandemic boom than something to be concerned about. 

Q1 Inland Empire triple-net asking rents fell to $1.32 per SF, an 8.2% change from their Q1 level of $1.43. In Los Angeles, overall asking rates decreased to $1.51 per SF in Q1 from $1.66 per SF the same time last year, a 9% drop.

“Rates are being pushed down with the additional sublease space and overall direct space coming onto the market as well,” Barrozo said.

In the Inland Empire, rents are expected to continue dropping as landlords offer concessions to keep tenants in place, according to Savills' IE report. Barrozo said  the market saw record deliveries at the end of 2023 — 12.2M SF — so it makes sense that there would be some knock-on effects of that much space being thrust on the market. 

“The amount of square footage that came online is the most we’ve seen yet,” Barrozo said. “You kind of have to take that into consideration as well.” 

This new space coming online, without pre-leased tenants lined up, is another mark of a shift away from the frenzy of the pandemic, Barrozo said. 

That new construction is also impacting vacancy numbers, which rose in Q1 along with the amount of available sublease space. 

Vacancy in Los Angeles rose to 5.4% from 3.3% in Q1 2023. In the Inland Empire, it shot up to 7.8% from 2.9% in the same quarter last year. 

Although the markets are different, their increased vacancy was chalked up to similar factors: increasing sublease space and new product coming online without tenants at the ready, according to Savills. 

Those factors contributed to the dips in average asking rents, Barrozo said. 

While falling rental rates and rising vacancy are startling, taking a long view indicates that both markets are fairly strong, Barrozo said, comparing Q1 2024 rates to Q1 2020 rates, before the pandemic and the jolt it gave to the sector.

In the Inland Empire, Q1 2020 rents were 70 cents per SF, and in Los Angeles, they were 84 cents per SF. The fact that rents are still so far above the pre-pandemic numbers is one of several indications that the market is righting itself, not starting a nosedive, Barrozo said. 

Another indication is that large leases are still being signed in the Inland Empire. Amazon inked two for a total of about 2M SF in late March, and all of the biggest leases were for more than 1M SF.