LA Industrial Market Report

Fall 2024 • RED 435

Industrial Market Analysis & Investment Evaluation: Class A Distribution Facility, Santa Fe Springs, California.

40-page market research and acquisition analysis of a $112M Class A industrial property in Los Angeles, covering regional economics, competitive positioning, and projected returns.

Acquisition analysis of a Class A logistics asset in Greater Los Angeles

Assignment

The assignment was to evaluate a $112M purchase of a Class A distribution facility in Los Angeles. Its tenant lease ends in 2028, leaving the full building to be leased in a market with rising vacancy and falling rents.

Analysis

I reviewed Los Angeles County population and employment, the regional industrial market, Mid-Counties vacancy and rents, comparable sales, and the property's underwriting. I also tested the assumptions against leasing, market, and financing risks.

Key Findings

The building was completed in 2018, has 36-foot clear heights, and is LEED certified. The model projected an 8.53% IRR. Mid-Counties vacancy reached 6.0%, up from 0.8% in 2022, rents were down 17% from their peak, and the tenant lease ends in 2028. I recommended passing at $112M ($277/SF) and reconsidering near $250/SF.

• RED 435: Analyzing Real Estate MarketsCourse
• University of Southern CaliforniaInstitution
• Fall 2024Semester
• 40-Page ReportAnalysis Scope
• 12588 Florence Ave, Santa Fe Springs, CAProperty Location
• Class A Industrial DistributionAsset Class

Regional economics, market dynamics, and submarket fundamentals

Los Angeles Industrial Market Overview

The Greater Los Angeles industrial market (954M SF) is experiencing cyclical correction after pandemic-era tightness. Market vacancy increased from historic low of 1.7% (2022) to 3.8% (Q3 2024) with seven consecutive quarters of negative absorption totaling 2.8M SF. Asking rents declined 17% from 2023 peak ($19.05 to $17.97 PSF), with landlords offering increased concessions (4-5 months free rent on 5-year terms).

However, structural factors suggest underlying market health. New construction remains limited at 6.2M SF (0.65% of inventory) due to land constraints: less than 5% of LA industrial inventory was built in the past decade versus 17% nationally. Port activity rebounded 14-15% year-over-year, indicating strengthening trade flows. Leasing activity improved to 11.9M SF in Q3 2024 (highest since Q3 2021), suggesting potential stabilization.

Santa Fe Springs Submarket Dynamics

The Mid-Counties/Santa Fe Springs submarket (103M SF) experienced dramatic vacancy increase from 0.8% (2022) to 6.0% (Q4 2024) with negative absorption of 1.6M SF year-to-date. Market rents declined 16.8% year-over-year to $16.21 PSF. Several significant tenant move-outs drove softness: Marathon Distribution (195K SF), Daiso (220K SF headquarters), GA Gertmenian (133K SF), and Shift (153K SF).

I-5 and I-605 connect the submarket to Los Angeles and Orange Counties. The Ports of LA and Long Beach are 18 miles away, and BNSF intermodal facilities are nearby. The area has modern industrial buildings with 36-foot clear heights. Only 588K SF was under construction across five buildings. These access and supply conditions may support demand, but vacancy and rents had weakened by Q4 2024.

Regional Economic Analysis

LA County population declined from 10.01M (2020) to 9.78M (2024), representing 2.3% decrease with projected continued decline of 0.10% annually through 2030. However, employment market shows resilience with 5.04M labor force (4.62M employed) growing 1.3% month-over-month. Unemployment at 5.7% (above national 4.2%) but improving. Median household income of $87,260 (15% above the national average) points to a consumer base that supports e-commerce and distribution demand.

Trade, Transportation & Utilities had a location quotient of 1.08 and was projected to add 99,400 jobs from 2020 to 2030, a 12.6% increase. That growth could add 7–10M SF of industrial demand. The Ports of LA and Long Beach handle about 40% of U.S. imports. Population decline remains a concern, while employment forecasts point to continued demand from logistics users.

Evaluation of physical specifications, location advantages, and competitive positioning

Property Strengths

• Modern 2018 construction with institutional specifications
• 36-foot clear heights
• LEED certified
• 52 dock-high doors + 2 drive-in doors (excellent loading)
• 185-foot truck court depth for operations
• 2 miles to the I-5/I-605 interchange
• 18 miles to Ports of LA/Long Beach
• Single tenant through 2027 (stable near-term cash flow)

Competitive Position

• One of only two 5-star properties in comp set
• Superior to older vintage competitors (2006-2010 built)
• Clear height matches market best (36' vs 30-37' range)
• Excellent loading ratio (1 dock per 7,650 SF)
• Central location between LA and Orange County
• Professional institutional ownership (Goodman)
• Modern building systems and sustainable design
• Limited new competing supply in submarket

Key Challenges

• Limited parking ratio (0.37/1,000 SF vs market standard)
• Only 149 spaces may restrict certain user types
• Fashion Nova vacating Dec 2027 (full lease-up required)
• Competition from newer 2021 development (2400 E Artesia)
• Rising submarket vacancy (6.0% vs 0.8% in 2022)
• Market rent decline (17% from peak)
• Car-dependent location (Walk Score 31)
• Subject to CA environmental regulations

Competitive Set Comparison

Cash flow projections, investment returns evaluation, and sales comparable analysis

Investment Returns Summary

Built 5-year cash flow projection incorporating current Fashion Nova lease through 2027 ($1.20 PSF with 4% annual escalations), followed by 6-month lease-up period with market rent assumptions of $1.64 PSF starting January 2028. Operating expenses projected at $3.85 PSF (property taxes $3.00, insurance $0.30, CAM $0.35, management $0.20) with 3% annual growth.

Investment Returns: Initial cap rate of 4.9% reflects below-market in-place lease and mark-to-market opportunity. Projected IRR of 8.53% with 1.36x equity multiple based on 6.0% exit cap rate and $131.9M sale price in Year 5. Total anticipated profit of $40.4M. However, projected returns provide minimal cushion above 8.0% target, insufficient to compensate for market risks, leasing uncertainty, and tenant rollover exposure.

Sales Comparable Analysis

I compared the proposed $112M purchase with recent sales. Modern Class A properties traded at $369–384/SF, though they were generally smaller. Santa Fe Springs comparables traded at 5.1–5.9% cap rates. Greenlaw Partners bought similar-vintage properties for $295/SF at a 5.1% cap rate in August 2024.

At $277/SF, the proposed price was close to recent trades while vacancy was rising, rents were falling, and absorption was negative. I estimated that a price near $250/SF would better reflect those conditions.

Market, leasing, and capital markets risks

Market & Vacancy Risk

• Submarket vacancy increased from 0.8% to 6.0% (2022-2024)
• Seven consecutive quarters negative absorption
• Large logistics facilities (250K-500K SF) showing 8% vacancy
• 1.6M SF negative absorption year-to-date in submarket
• Tenant rightsizing/move-outs across submarket
• Full building lease-up required in 2028

Rental Rate Risk

• Market rents declined 17% from 2023 peak
• Submarket rents down 16.8% year-over-year
• Effective rents declining 25% with concessions
• 4-5 months free rent common on 5-year terms
• $1.64 PSF market rent assumption may be aggressive
• Current Class A range: $1.50-$1.75 PSF

Capital Markets Risk

• Cap rates expanded 100+ bps to mid-5% range
• 6.0% exit cap assumption may prove optimistic
• Rising interest rates pressuring valuations
• ULA transfer tax (4-5.5%) on sales over $5M
• Limited transaction velocity in current market
• Inflation pressuring operating expenses

Investment Recommendation

Documentation and analysis materials