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Los Angeles Basin Industrial Sector Propelled by eCommerce, Buoyed by Many Factors

John Minervini • 9/22/2020
The Los Angeles Basin industrial sector has remained buoyant for the most part through the pandemic, driven largely by strong occupancy growth in the Inland Empire together with other select markets in the region—although not all markets are seeing growth as some are facing more difficulty than others.
Port Container

But, the overall growth in the region has been significantly propelled by the demand and necessity of eCommerce. US retail eCommerce sales for the second quarter of 2020 totaled $200.7 billion, an increase of 37.0% (±1.2%) from the first quarter of 2020 and 44.4% from the second quarter of 2019.

There are also several benefiting factors and/or trends now increasing the demand for industrial space. Container imports are flowing back into the US after a six-month hiatus, with US retailers knocked back by pandemic-driven lockdowns now stocking up before the holiday season. And although COVID-19 continues to create long-term economic uncertainty, the Port of Long Beach had the best August in its 109-year history, marking a strong start to the peak shipping season. Meanwhile, the Port of Los Angeles posted the first monthly cargo increase in a year which was driven by imports, which surpassed 500,000 TEUs for the first time while overall monthly volumes were the strongest ever for the port. Furthermore, the Global Port Tracker forecasts September imports will increase 1.1% from September 2019. Though a modest year-over-year gain, it is up sharply from the 9.4% decline the group forecasted last month.

July also marked the third straight monthly increase in consumer spending yet represented a slowdown from the previous two months. However, the Consumer Confidence Index declined to a reading of 84.8 in August, the lowest level since May 2014 and the second straight monthly drop. The reading reflects the impact the COVID-19 pandemic is inflicting on the economy and consumers mindsets. 

As for how much more new product may be needed in the Basin’s industrial sector, that is a very difficult question to peg, even if just ballpark. Foremost, the nature of the economic recovery is highly uncertain and ultimately tied to the path of the pandemic and the actions taken to contain it. As well, despite the strong tailwinds in the industrial sector, the COVID-19 era is still a recessionary period and any recession can cause pain for consumers and businesses. That said, Prologis has estimated that eCommerce companies require 1.2 msf of distribution space for each $1 billion in sales, and so with eCommerce continuing to expand through the pandemic, strong demand for infill fulfillment facilities should continue.

As well, when looking at our statistical trends since 2008 through 2019, as to factor in the Great Recession downturn period, the Los Angeles Basin is averaging 77.7 msf of new leasing activity per year—which we are about half that level through the first half of 2020. Meanwhile, net absorption, or occupancy growth, has averaged 15.7 msf per year in that period. And while we are trending negative in the first half of 2020, we do anticipate a return to positive soon ahead. We currently have around 24 msf under construction, which will certainly take some time to work through, but just how long would be anybody’s guess. But, to give some perspective, following the Great Recession it took less than three years to absorb 24 msf (do note, our region will surely see construction levels rise above that so it’s not that straightforward).

Trucks Loading DockWe currently face a severe lack of modern product in both Los Angeles and Orange County where less than 20% of inventory was built after 1992 and vacancies remain tight at under 3%. Meanwhile, development activity is very minimal with under construction figures at just 3.4 msf in Los Angeles, a mere 0.3% of total inventory. In Greater Los Angeles, excluding the Inland Empire and Orange County markets, there is also a scarcity of new state of the art industrial buildings with 30- to 40-foot clear space—and virtually none satisfying 40 feet plus requirements. There is currently a great need for last mile high tech space especially for the grocery industry, including automation and robotics and AI. Facilities with 60-foot clear robotic freezer cooler space is non-existent with a few build-to-suit projects being negotiated in that regard. How much more is needed is constrained by available land, which is now valued at $75-80 per square foot. Notably, in the last three years, the average price for industrial land over two acres in Los Angeles County has increased nearly 50%.”

As the pandemic pushes on, the shift in consumers moving to online shopping has massively accelerated the growth of eCommerce and that shift may be permanent. eCommerce growth will continue to fuel strong demand for fulfillment facilities and the need for last-mile facilities bodes well for the industrial sector. As such we should expect the industrial-logistics sector to weather the crisis better than most other product types. We are also tracking increased demand from industrial occupiers and expect to see stronger growth in Southern California in the latter half of this year. Nonetheless, the overall climate across the industrial marketplace still remains one of cautious optimism. With still relatively low vacancy, it’s clear that investors and developers alike are still bullish and recognize the demand particularly for quality industrial space in Southern California.