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What does growth of LAs light industrial market look like relative to the rest of the country?
EXECUTIVE SUMMARY
While light industrial spaces can encompass a variety of business types, from printing and auto repair to manufacturing and packaging, the primary focus of current industry market reports is on the last-mile retail warehouse sector, which caters to the quick delivery schemes of many e-commerce companies. This sector is particularly relevant to the Los Angeles market. In the LA market, light industrial properties are at a premium as retailers seek to occupy spaces that will allow them to dominate the last-mile delivery sector in this large consumer market. Compared to the rest of the country, it would appear that the growing e-commerce market in Los Angeles is creating greater demand for light industrial spaces than the market can currently meet. Construction of new, multi-story warehouses may be needed to meet the demands of the growing e-commerce market, which is scooping up the limited light industrial properties in Los Angeles.
METHODOLOGY AND ASSUMPTIONS
While there is no pre-existing information to fully answer your question, we've used the available data to pull together key findings regarding the market growth of the US light industrial property sector from 2016 to 2017, market indicators of the broader Los Angeles industrial property sector, and trusted media articles pointing to Los Angeles' potential as a leader in last mile distribution network, a current trend in light industrial real estate.
Most market reports on the industrial real estate market, in general, refer to light industrial as smaller warehouse-type spaces in the "50,000 to 250,000 square feet" range. Though I searched specifically for information on light industrial properties as they relate to manufacturing, packaging, fabrication, and other small space uses, my research continuously led me back to light industrial spaces used primarily for retail and e-commerce warehousing and distribution, especially in the Los Angeles area. Therefore, I also searched for market reports on the commercial and light industrial real estate market, as well as real estate investment trust statistics, in the US and Los Angeles to compile the data in this report.
FINDINGS
US LIGHT INDUSTRIAL MARKET GROWTH
Market research shows that the US light industrial property sector is leaning toward rentals instead of property sales. According to a recent article from Philly Industrial Space, the U.S. logistics and light industrial properties' investment sales volumes dropped 13% year-to-year in Q1 2017 based on CoStar Portfolio Strategy's research. An earlier article from CoStar reported that rentals for older light industrial properties increased 10.4% in Q4 2016 compared to the same period in 2015. This is driven by demands for last mile delivery points, the article noted. "In our recent study, we identified more than 10,000 buildings across the US suitable for last-mile distribution, with rent growth of over 10% last year. We’ve recently seen a great deal of interest in light industrial product that is suitable for last-mile distribution. Investors are right to be interested," CoStar consultant Shaw Lupton stated.
According to Colony Northstar, "Light industrial properties account for over half of the institutional industrial investment market and leases less than 75,000 square feet account for 96% of all industrial lease transactions nationally; demonstrating both significant liquidity and demand."
CoStar's First-Quarter 2017 U.S. Industrial Market Review and Forecast found that industrial REITs (real estate investment trusts) are shifting their focus "from acquisition to development" because of the shortage in warehouse space. Thanks to online retailers, vacancy rates in the industrial property sector are the lowest they have been in 17 years, and rents are at their highest. Industrial real estate, in general, is at a premium, with US light industrial property sales dropping 13% in Q1 2017 as demand outpaces supply. The report states that because of a 15% annual growth in e-commerce, "logistics and light industrial absorption grew at a rate of 3.8% in the first quarter, twice the pace of GDP growth in the broader economy." The report forecasts accelerated absorption for light industrial properties due to the increased demand from retailers to command the last mile of delivery in populous locations.
Logistics professionals define last-mile warehouses as those that service the last 30 minutes of the distribution supply chain to the consumer or final destination. Colony Northstar also notes that the US "last-mile" industry is highly fragmented, has higher occupancy and stronger rent growth than bulk warehouses, but has limited new development, which makes up about 1% of all inventory.
As investors gravitate to light industrial properties to cash in on the last-mile movement in retail, smaller and older properties that once sat idle on the market are now commanding higher rents to fill the demand. According to Costar, "Rents for older light-industrial properties rose a whopping 10.4% in fourth-quarter 2016 from a year earlier, higher than the 6.4% quarterly rent growth in the broader industrial market, as demand tightened for Class B product closer to the urban core suitable for use as last-mile delivery points." A July 2017 article at Bisnow suggests that rents for small, light industrial properties have grown 15% since 2015 and make up 15% of all new industrial construction in the US.
LOS ANGELES LIGHT INDUSTRIAL MARKET GROWTH
Since 2015, e-commerce has overtaken brick-and-mortar retail stores as the "single most active sector in the industrial real estate market" in Los Angeles. The movement of the e-commerce market toward more same day/next day delivery was cited prominently in every article or report I unearthed regarding the future of the Los Angeles light industrial real estate market. While the e-commerce sector typically favors big box properties, limited inventory has increased demand for smaller spaces that are close to consumers. In the LA market, the shift among e-commerce and logistics companies toward last-mile facilities has increased demand for light industrial real estate, according to a 2017 CBRE report. In a third-quarter 2016 market report by JLL, it was noted that competition for light industrial spaces in Los Angeles was keen due to low inventory, rising rental prices, and vacancies of less than 1.0%. Property landlords are benefiting from a 9% year-over-year rental increase. The report further noted that the South Bay market sees the most leasing activity, followed by Central Los Angeles. However, another report states that the first half of 2017 saw sales of light industrial spaces drop 6%, likely because owners do not want to give up these valuable assets.
An article on National Real Estate Investor states, "Southern California currently has 1.8 billion sq. ft. of industrial stock, but will never have enough space to meet demand because of growing e-commerce needs." A report by Lee Chang Group suggests that warehouse space was in the highest demand within the industrial real estate segment in the Los Angeles area with only a 2% vacancy rate.
John DeGrinis, senior vice president in the San Fernando Valley sub-market of Colliers, suggests that the construction of multistory warehouses may be the only alternative to increase last mile distribution/warehouse space in places like Los Angeles, where e-commerce represents around 11% of the retail market for the city's infill sub-markets. He states that both land and vacant last-mile distribution space is quite scarce with vacancies at 1.0% and lower. The increase in e-commerce had led to the demise of many Los Angeles brick-and-mortar stores, which have in turn vacated their warehouses, providing available properties to meet some of the growing demand of the light industrial sector.
The NAIOP (National Association for Industrial and Office Parks) reported that thanks to generally navigable geography, dense population and plentiful industrial inventory, "Chicago, New Jersey and Los Angeles are well-positioned to lead the nation in establishing state-of-the-art last-mile warehousing networks." NAIOP noted, "In Greater Los Angeles, especially in the infill markets of Los Angeles and Orange counties, available land is at a premium... As a result, it is no surprise that industrial developers have looked at redevelopment in existing industrial areas to replace functionally obsolete buildings that may be several decades old."
CBRE Research runs an interactive map of the average last mile infrastructure of the 15 largest US metro areas including Los Angeles. The average last mile measurement for LA is 6.6 miles. "Last-mile infrastructure development is still in its early stages and the markets with shorter distances indicate more progress has been made in densely populated urban centers." This means that LA is somewhat ahead of other markets, considering that the average last mile in major US cities is really 6 to 9 miles.
Collier's Q3 2017 LA Industrial Report also gives the following key findings regarding the broader industrial real estate sector.
• "Asking rents rose to $0.68 PSF NNN (per square foot - triple net), the highest reported rental rate for the Greater Los Angeles Basin."
• "The Greater Los Angeles Basin industrial market absorbed 6,025,000 SF [square feet] of industrial space this quarter with uneven gains by region. Absorption was highest in the Inland Empire at 6,624,500 SF while Orange County reported 37,300 SF of negative absorption."
• "This quarter saw 8,737,900 SF of industrial space added to the base. Despite the current construction boom taking place, vacancy has remained flat over the quarter at 2.2%."
Echoing the findings of the NAIOP report, Colliers noted that "The industrial market is beginning to mature, particularly in Los Angeles and Orange Counties, as 60 percent of the buildings in the LA Basin are greater than 20 years old."
In the broader industrial property sector, JOC reported this June that industrial real estate rates in Los Angeles along with New York and New Jersey "rose at least 10 percent year-over-year in the first three months of 2017".
CONCLUSION
To summarize, the Los Angeles light industrial market is seeing huge demands from the e-commerce sector, which is driving up rents and reducing vacancies. New construction of multi-story warehouses may be the only solution to creating the property supply needed to meet the overwhelming demands.