“Normal Watch” looks at economic trends making sharp turns and ponders if the moves are simply a return to B.C. conditions – before coronavirus – or a serious warning signal.
Buzz: Empty warehouse space across Southern California has tripled in just two years.
Source: My trusty spreadsheet peeked at Southern California vacancy stats for what’s known as “industrial real estate,” as tallied by the JLL brokerage.
Fuzzy math: How crazy were the nearly sold-out conditions back in the mid-pandemic days?
Politely put, the warehouse craze is over. At mid-year 2023, Southern California’s industrial real estate had a 2.7% vacancy rate, up sharply from last year’s 1.4% rate and even ridiculously lower 0.9% in 2021.
That’s 47 million square feet of “officially” empty warehouse space out of a total supply of 1.74 billion square feet of space. Or, in terms of football fields worth of real estate, that’s loosely 800 vacant out of 29,000.
Look at the turnabout in local markets.
Inland Empire: 3% vacancy rate – 18 million square feet empty out of 615 million – up from last year’s 1.2% rate and 0.5% in 2021.
Los Angeles: 2.6% vacancy – 20 million of 781 million – vs. last year’s 1.5% rate and 1% in 2021.
Orange County: 2.1% vacancy – 4 million of 210 million – vs. last year’s 0.8% rate and 1.5% in 2021.
San Diego: 3% vacancy – 4 million of 129 million – vs. last year’s 2.2% rate and 1.9% in 2021.
Many folks are back working in offices, studying in classrooms and shopping at the mall. And the shipping world has slowed.
This spring, for the first time in 13 years, local logistics firms rented less space than what was added to the market. This worrisome pattern is known as “negative absorption.”
But let’s assume that the average vacancy rates for pre-pandemic 2013-20 are a reasonable yardstick of normalcy.
The current level of Southern California’s empty warehouses is below its 3.2% average vacancies. The same can be said for the Inland Empire (4.5%), Orange County (2.7%), and San Diego (4.5%).
Only the LA vacancy rate is above its norm of 2.4% from 2013-20.
Logistics companies got a little crazy with leasing habits mid-pandemic when in-person shopping was limited and deliveries became the hot, new thing.
Ponder that “official” vacancy rates do not include warehouses that are leased, but not used. So this real estate is back on the market as a potential “sublease” space.
Across Southern California, there are 55 million square feet of leased warehouses trying to be re-rented by the tenants. This sublease space equals 3.7% of the supply – more than the empty spaces controlled by landlords.
Much of these empty warehouses are in the Inland Empire – 30 million square feet of subleases is 4.9% of its supply. Los Angeles has 16 million square feet or 2.1% of the supply. Orange County’s 4 million is 1.8% of the supply. And San Diego’s 4 million is 3.4% of the supply.
Nerve-wracking, Part 2
All that mid-pandemic warehouse excitement got developers in a building mood.
So Southern California has 31 million square feet of industrial space under construction. That upcoming supply is equal to 1.8% of all existing warehouse space.
The bulk of new warehouses is coming to the Inland Empire, where 21 million square feet are being built, or 3.4% of its supply. LA’s 6 million is 0.8% of its supply. Orange County’s 2 million is 1% of its supply. And San Diego’s 2 million is 1.6% of its supply.
Warehouses have swiftly gone from the sexiest thing in commercial real estate to, relatively speaking, a modest worry for property owners.
Look at what investors are telling us. The real estate investment gurus at Green Street estimate that U.S. industrial property values are off 8% from their mid-pandemic peak hit last year. That follows a 53% jump earlier the pandemic, gains powered by the shop-from-home revolution.
But the industrial dip off its peak is half the 16% reversal found in Green Street’s all-property index. And this broad commercial real estate value benchmark gained only 15% when investors flocked to property ownership early in the pandemic era.
Plus, warehouse woes are nowhere near the ills of office space, a niche that suffers from lifestyle changes that boosted warehouses – folks spending more time at home, notably for work.
Green Street’s math shows office values down 35% in the pandemic era. Ouch!
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]
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