Strong Future Growth Predicted for SoCal Industrial Market Despite Recent Performance

In 2024, Southern California's industrial real estate sector faced a slowdown after years of growth. This shift was driven by cooling demand and a rise in new supply, leading to increased vacancy rates and slower rent growth, according to a CommercialEdge report. Despite significant growth in rents over the past year, new lease rates have dropped, reflecting the weaker market conditions. Prologis, the largest industrial REIT, also noted sluggish demand and predicted continued softening, with effective rents expected to decline due to growing concessions.

Record-Breaking Port Activity Amid Industrial Slowdown

Despite the industrial market slowdown, the ports of Los Angeles and Long Beach saw their busiest months ever in July 2024. However, this surge in container volumes is not expected to immediately affect vacancy rates, as logistics companies have adjusted by maintaining excess capacity. While the short-term outlook is soft, long-term prospects for the region remain strong as the supply boom begins to taper off.

Nationwide Construction Slows in 2024

As of July 2024, 379 million square feet of industrial space were under construction across the U.S., representing 1.9 percent of total stock. The construction pace has slowed after the U.S. industrial market added over 1.1 billion square feet in 2022 and 2023, expanding by 5.8 percent. By mid-2024, 229.3 million square feet had been delivered, signaling the start of the slowdown. New construction starts have also dropped, from over 500 million square feet in 2021 and 2022 to just 127.2 million square feet in 2024.

Key Markets with High Construction Pipelines

Certain U.S. markets have seen significant construction activity relative to their existing industrial stock. Phoenix leads with 9.2 percent of its stock under construction, followed by Kansas City, Memphis, Denver, Charlotte, and California’s Central Valley. In total, industrial sales reached $30.7 billion by July 2024.

Premium Prices for New Industrial Leases

In July 2024, the national average rent for industrial space rose to $8.15 per square foot, an increase of 730 basis points from the previous year. Inland Empire saw the highest rent growth, with in-place rents increasing by 12.4 percent, followed by Los Angeles, Miami, New Jersey, and Orange County. Despite a rise in vacancy rates to 5.6 percent, the influx of modern, high-quality spaces has driven up rents for new leases. New lease rates averaged $10.54 per square foot, well above the average for existing leases, with Miami, Charlotte, Dallas, Los Angeles, and Nashville commanding significant premiums for new spaces.