Class B is new ‘A’ in tight LA-LB warehousing market

Class B is new ‘A’ in tight LA-LB warehousing market

Los Angeles warehouses.

With industrial vacancy rates in Los Angeles-Long Beach close to 1 percent for the past two years, and rents increasing by 12 percent a year, e-commerce fulfillment, light assembly, and specialty retail importers in Southern California are paying record prices for Class B and C properties. (Above: Los Angeles, with warehouses in the foreground.) Photo credit: Shutterstock.com.

Demand for warehouse and distribution space around the Los Angeles-Long Beach port complex is so high importers, logistics providers, and e-commerce fulfillment firms are snapping up Class B properties with the same fervor they show for Class A distribution facilities. And some beneficial cargo owners and service providers say they will gladly take a Class C property if the location is right.

The lowest overall industrial vacancy rate in the United States at 1.2 percent, and a 12.1 percent increase in rental rates compared with the first quarter of 2017, are not deterring multiple bids on available properties, according to the first quarter Los Angeles-Long Beach Industrial Market Report released this week by Lee & Associates. Rental rates in Los Angeles are always among the highest in the United States. In the first quarter, the average rental price for all industrial properties in Los Angeles was $9.84 per square foot, compared with the US average of $5.99, according to Cushman & Wakefield.

The report noted that all eight industrial properties that were sold in the first quarter in what is known as the South Bay were 49 years old or older. “This illustrates the urgency of business owners to secure a location in the South Bay while locking in historically low interest rates,” the report stated.

Normal sales activity in the South Bay is only about 20 industrial properties per quarter because of the extreme shortage of industrial properties in all categories. The Class C properties sold at a record $169.02 per square foot, which demonstrates the continued high demand for industrial space close to the largest US port complex and within easy reach of consumers in the second-largest metropolitan area in the country.

Class A properties: top amenities, high-income tenants

Realty Mogul defines Class A as newer properties built within the past 15 years with top amenities and high-income earning tenants. Class B properties are somewhat older, with lower income tenants, lower rental income, and some deferred maintenance issues. Class C structures are more than 20 years old, in less desirable locations and in need of renovation. In the South Bay, the Class C properties are often 100,000 square feet or less, with ceiling heights of 20 feet or lower, and they have limited turning radius for trucks, said David Bales, principal at Lee & Associates. What makes Class C industrial properties in the South Bay different from many regions is that the location is desirable for e-commerce fulfillment and import distribution for specialty retailers.

Class A industrial properties, which are common in the Inland Empire 50 miles east of Los Angeles, are often 500,000 to more than 1 million square feet with ceilings 30 feet or higher and ample parking for trucks and autos. Class B facilities usually have 24-foot or higher ceilings and provide a truck radius of more than 125 feet. However, the longer, increasingly costly trucking requirements make the Inland Empire less desirable for high-volume, time-sensitive shipments within the Los Angeles metropolitan area, and these factors have caused Class C properties to increase in value for some cargo owners.

Lee & Associates noted that container volume in Los Angeles-Long Beach in the first quarter increased 4.69 percent after a record volume in 2017, and with the growth in e-commerce fulfillment, light assembly, and traditional import and regional distribution, demand for all classification of industrial properties will remain strong for at least the next two years.

Los Angeles-Long Beach stands out among large port cities for its local and national goods distribution needs. “Southern California is king,” said Scott Weiss, vice president of business development at Port Logistics Group. Los Angeles-Long Beach is the largest North American gateway, and distribution optimization studies show that in terms of transit times and the ease and cost of serving multiple inland destinations, Los Angeles-Long Beach is the preferred routing for many importers in the trans-Pacific, Weiss said.

Fierce competition for Class A/B in South Bay

Competition for Class A and B industrial properties in the South Bay is fierce, with virtually all of those properties generating multiple offers. This hyper demand is squeezing businesses with mid-level credit out of the market, Lee & Associates stated. Owners generally prefer to sell to institutional investors with cash offers than to owner/users that must secure a loan, Bales said. As a result, demand is high for Class C properties that would be considered functionally obsolete in locations with softer demand.

E-commerce fulfillment is a major contributor to demand for industrial properties that are close to both the port complex and the end consumer. Weiss said small, ugly properties in the right location in Southern California are better than beautiful, functionally superior properties in the wrong location. This strong demand has compressed the price spread between Class A and B properties, and is resulting in record prices for Class C properties. Rental rates continue to increase rapidly for all categories. “I’ve been in  this business for 22 years and have never seen a market like this,” he said.

If they are structurally sound, older Class C properties with limited truck bays may be adequate for light-assembly or e-commerce activities, and may require only painting and modest refurbishing of the exterior, Bales said. With industrial vacancy rates in the South Bay close to 1 percent for the past two years, rising sales prices and rents will continue, he said.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.