Developers ‘Hit the Brakes’ on L.A. Warehouse Construction

Even with a $1 billion deal between heavyweight warehouse investors Blackstone (BX) and Rexford Industrial Realty, Los Angeles County saw significant market corrections in the first quarter this year after the booming post-pandemic era.

L.A. has a lot more unused industrial real estate now compared to when vacancy rates were close to zero a few years ago, which has led to lower asking rents and reduced investor interest, a new report from NAI Capital shows. L.A. County saw its industrial vacancy rate rise 180 basis points annually in the first quarter of 2024, to 4.8 percent. Landlords are concerned while tenants enjoy new leverage in negotiations.

L.A. County also has a lot more warehouse sublease space available, up almost 25 percent from the end of 2023 and 77 percent higher than the first quarter of 2023, to a record high of 11.4 million square feet.

The rise in availability caused average asking rents to fall by 1.8 percent from the previous quarter to $1.65 per square foot per month. With rent growth no longer returning double-digit increases, developers are less bullish on adding more space, and the rate of new projects is starting to normalize. The amount of space under construction is down 6.6 percent from the prior quarter, but completed construction fell 58.7 percent compared to 2023, and by 65.8 percent quarter over quarter.

“Developers that raced to meet the demand for warehouse space spurred by e-commerce, adding much-needed capacity, have hit the brakes on development,” NAI Capital’s report read.

The rampant pace of warehouse construction the past few years caused much of the market moderation this year. Since 2022, L.A. County added 10.2 million square feet of new construction, while market absorption has resulted in a negative 21.9 million square feet during the same time.

On the investment sales side, first-quarter volume on a square-foot basis declined by 18.3 percent from last year, with the average price per square foot down 5.9 percent from the first quarter last year. However, total dollar volume shot up 77 percent from the previous quarter thanks to Rexford buying 36 industrial buildings from Blackstone, which included 2.5 million square feet in L.A. County.

“The combination of elevated interest rates and slowing demand will continue to have a settling effect on pricing heading into the first half of the year as opportunity is seized in the marketplace,” the first-quarter report said.

E-commerce warehousing will continue to drive and bolster the market, per NAI Capital. Data from the Port of Los Angeles and Port of Long Beach show inbound cargo volumes increased by 32 percent year-to-date as of February.

The top tenant deals included STG Logistics renewing for more than 418,000 square feet, Key Container Company signing a new lease for nearly 370,000 square feet, and packaging company 8 Net signing a sublease deal for 160,000 square feet.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.