From the major ports’ labor dispute to Silicon Valley’s continued innovation, the industrial sector is experiencing significant ups and downs along the West Coast.
Kidder Mathews, the largest independent commercial real estate firm on the West Coast, examines key industrial trends and developments from Seattle to San Diego, including a labor dispute involving 22,000 longshore workers at 29 ports.
Southern California Ports Stall
Expect no more rent growth in the Greater Los Angeles metro for the rest of the year, asserts Kidder Mathews EVP Luke Staubitz, SIOR in the firm’s El Segundo office. He says rents for new leases plateaued in the third quarter of 2022, with some regression in Class A and B inventory. “Occupiers are reducing inventory, the tentative ILWU/PMA agreement has just been reached, and buildings are sitting vacant that would have leased very quickly prior to the third quarter of 2022. While the port deal should stimulate more inbound cargo, it’s not as if a floodgate has been opened overnight. In fact, landlords are now pursuing tenants.”
It’s much of the same story in Orange County. Kidder Mathews EVP and Managing Director Tom Holland, SIOR, CCIM, CPM declared it no longer a landlord’s market. Transaction volume is “falling off a cliff,” and industrial rental rates will likely begin to drop. “While supply chain issues seem to be behind us, businesses are struggling with inflationary issues, rising interest rates, stringent lending requirements and, making matters worse, the shortage and cost of labor.”
Onshoring, a key strategic response to supply chain delays, has been the largest overall driver for growth in Southern California, according to Kidder Mathews SVP Todd Davis, SIOR, in the firm’s Carlsbad, CA office. He noted nearby Tijuana’s 50% growth in lease rates over the past four years as an outstanding example of expansion across North America. Despite that consumer demand-based driver, Davis anticipates rent increases to cool and free rent concessions to increase.
Silicon Valley’s Innovative Industrial
The advanced manufacturing segment leads the industrial way in San Jose. Lack of supply and land for new development have driven rent growth of 10% to 15% for this type of space the last few years, but interest rates have created uncertainty with a large disparity still evident between buyers’ and sellers’ expectations, according to Craig Leiker, Kidder Mathews EVP.
Dave Vanoncini, EVP and Managing Director at Kidder Mathews’ San Jose office, added, “The pullback from Amazon will have an impact on the market, no doubt, but I believe other sectors such as companies focused on electric and autonomous vehicles, robotics, biotech, medtech, and battery innovation will continue to want R&D and industrial space. Those companies are still receiving funding and seem to be expanding.”
Puget Sound Stabilization
Lack of supply was the primary driver of industrial rent growth in the Puget Sound market — the eastside saw rents double over the last five years — but the rising cost of capital has helped stabilize, if not cool down, lease rates. Although still expensive to move, tenants are experiencing more freedom.
“Demand for newer product will continue to thrive in the near-term, especially in core markets with Class A rents continuing to stabilize, vacancy rates remaining low and very few developments breaking ground,” said Kidder Mathews EVP Zach Vall-Spinosa in Bellevue, WA. “However, we are also seeing a rise in both second and third generation space availabilities – driving increased competition among tenants. Because of this, the Class B and C segment is expected to experience more balanced lease negotiations with improved concessions from landlords.”
Contact
GARY BARAGONA
Director of Research
415.229.8925
gary.baragona@kidder.com
Stay in the know and subscribe to our monthly West Coast Market Trends report and our quarterly market research.