Rexford Tenants Staying Put, Helping Company Avoid Broader Slide

Industrial landlord Rexford's focus on smaller-format properties in Southern California has insulated the company from the broader slowdown in warehouse demand nationwide, executives said Thursday.

During its Q2 earnings call, Rexford took pains to distinguish itself from the wider industrial market, specifically, the bigger boxes that were the focus of attention and rent increases during the pandemic. The firm’s executives underscored that Rexford’s average asset measures approximately 26K SF, a market that has a higher barrier to entry, especially in SoCal.

Rexford executives said tenants are proactively renewing their leases even though they have 4% increases baked in, indicating those tenants seem to be anticipating future rent increases marketwide and are content to stay put.

Nationally, net absorption for industrial property declined year-over-year to 45.5M SF from 74.4M in Q2 2023, according to a Q2 report from Savills. The overall vacancy rate rose to 7.1% from 4.7% in the same period the prior year. 

Rexford's end-of-quarter vacancy was 2.7%, beating the overall Southern California infill market vacancy of 3.9%.

Across Southern California, the market has seen record highs fall by the wayside as consumer spending has dropped, according to a second-quarter report from Newmark. The report predicted a rise in vacancy “for the foreseeable future” as well as a rise in sublease space. 

Rexford said that it had eight new subleases totaling about 275K SF of space signed in the second quarter. In Q1, the firm had 12 subleases signed for an undisclosed amount of square footage, though Chief Financial Officer Laura Clark said “subleasing activity is pretty much in line” with the firm’s five-year historical average. 

Despite its niche focus, the firm noted it is keeping an eye on some of the same trends affecting industrial properties, large and small, as well as their owners. 

The continued drop-off in third-party logistics occupiers and the excess space left in their wake is something that has had a ripple effect across the wider market, Rexford executives said. 

“In the 3PL world, there's been excess capacity, and that capacity has to get absorbed before you see any dramatic increase in leasing,” Rexford co-CEO Howard Schwimmer said. 

Rexford is also keeping an eye on the potential for shifting policies around tariffs that could go into effect after the presidential election. Planning for a situation in which tariffs return has some foreign manufacturers on the hunt for space in Southern California, the company said. 

The industrial REIT's leaders also discussed the recurring issue of getting adequate power to industrial properties, something that would only become more important if manufacturing users were poised to grow their footprints locally. 

While Rexford conceded it expected “a nominal level of volatility” in the near term, it is bolstered by anticipated rent growth.

“The long-term outlook for our infill Southern California market remains very positive due to a virtually incurable long-term supply-demand imbalance,” Rexford co-CEO Michael Frankel said.