Market Insights: Trends, News, & Analysis

September 2, 2021

We scan the latest market research, reporting, and analysis each week to spot emerging trends and patterns for the Los Angeles and Inland Empire commercial real estate markets.

Here’s what we’re tracking as September begins:

      • E-commerce at LA ports squeezes available storage and warehouse space
      • Modernized Inland Empire trucking terminals present upsides for industrial investors
      • Retail remains stable in Southern California for now, but the expiration of the commercial eviction moratorium in 30 days may spell trouble
      • New environmental regulations for commercial buildings predicted to drive high construction costs even higher in California

 

As port-side space becomes scarcer and e-commerce continues to grow, some investors are turning their attention to ISPs, or Integrated Service Providers. ISPs are modernized truck terminals with the ability to handle high-volume flow-through.

These industrial buildings either redirect cargo (usually from containers to truckloads) or consolidate and redirect freight. In Southern California, that generally involves offloading containers from China at the ports of Long Beach or Los Angeles, and moving them to ISPs in the Inland Empire. It’s more cost-effective to de-containerize and redistribute cargo to trucks or rail cars from Inland Empire facilities than it is to handle that work onsite at ports where traffic is challenging, land is scarce, and real estate prices are at a premium.

Commercial real estate investors are keeping an eye on these properties. ISP property values are dependent on location, but cap rates on these assets tend to be on average 1.5 percent higher than those for class-A warehouse properties.

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Surging demand for warehousing close to major ports driven by the growth of e-commerce and the flood of container imports hitting U.S. shores is making storage space harder to find and more expensive, adding new stresses to already strained supply chains.

Logistics service providers and real-estate firms say competition for warehouses close to ports such as those in Southern California and New York City is intense, pushing up rents and forcing companies to look to neighboring regions to serve shippers’ needs.

The pinch is most pronounced in the industrial region close to the nation’s busiest ports at Los Angeles and Long Beach. “You can literally count on your hand at best how many spaces are available in that entire region,” said Carl DeLuca, head of real estate in the Americas for DHL Supply Chain, a unit of global logistics giant Deutsche Post AG.

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Businesses that occupy retail space—restaurants, bars, goods, services and entertainment—have been especially impacted in recent months. But the real estate market throughout California has yet to feel the full impact thanks to the state’s commercial eviction moratorium that runs through Sept. 30.

The Downtown Los Angeles retail vacancy rate actually decreased quarter-over-quarter from 5.4% to 5%, while suburban vacancy increased slightly from 5.5% to 5.7%. Over the last 12 months, average asking rents in Downtown and suburban markets decreased 1.3% and 1%, respectively, to $2.66 and $2.32 per square foot.

The moratorium has kept vacancy and asking rents stable—for now. Once the moratorium expires at the end of this month, however, more businesses are likely to close.

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This month, state regulators updated California’s building code to require new homes and commercial buildings to have solar panels and batteries and the wiring needed to switch from heaters that burn natural gas to heat pumps that run on electricity. But some energy and building experts warn that these new requirements will drive up the state’s already high construction costs.

The changes regulators adopted this month will also require most new commercial buildings, including schools, hotels, hospitals, office buildings, retailers and grocery stores, and apartment buildings and condos above three stories to include solar and batteries.

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