Industrial Market Analysis &
Investment Evaluation

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.

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).

Despite current challenges, submarket benefits from strategic positioning between LA and Orange Counties with exceptional I-5/I-605 access, 18 miles to Ports of LA/Long Beach, and proximity to BNSF intermodal facilities. Modern inventory base with 36' clear heights positions submarket above competitors. Limited land availability constrains new supply—only 588K SF under construction across 5 buildings. Structural advantages suggest cyclical softening rather than fundamental deterioration.

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 national average) demonstrates region's affluent consumer base supporting e-commerce/distribution demand.

Critical to industrial demand: Trade, Transportation & Utilities sector (location quotient 1.08) projected to add 99,400 jobs (12.6% growth) 2020-2030, potentially generating 7-10M SF additional industrial space demand. Region's role processing 40% of US imports through LA/Long Beach ports provides irreplaceable logistics advantage. Despite demographic headwinds, employment growth in key industrial-using sectors supports long-term market fundamentals.

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.

Proposed purchase price of $112M ($282/SF) evaluated against recent market transactions. Modern Class A properties achieving $369-384 PSF, though typically smaller facilities. Recent comparable sales in Santa Fe Springs demonstrate cap rates between 5.1-5.9%. Greenlaw Partners portfolio acquisition (August 2024) at $295/SF included similar vintage properties at 5.1% cap rate.

Pricing appropriately reflects premium building quality, larger size, below-market in-place rent, and strong location fundamentals. However, proposed $277/SF provides minimal discount to recent trades despite deteriorating market conditions (rising vacancy, declining rents, negative absorption). More attractive basis closer to $250/SF would better align with current market environment and provide adequate downside protection.

RECOMMENDATION: PASS AT CURRENT PRICING

Despite strong property fundamentals (modern construction, high-quality specifications, strategic location), recommend passing on acquisition at $112M ($277/SF). Projected 8.53% IRR provides insufficient risk premium given current market headwinds, full building lease-up requirement in 2028, and aggressive market rent assumptions.

Key Decision Factors: Initial 4.9% cap rate sits well below market average (5.3%) for industrial properties. Seven consecutive quarters of negative absorption and rising vacancy (3.8% market, 6.0% submarket) indicate challenging leasing environment. Market rents declined 17% from peak with increased concessions. Exit cap rate assumption of 6.0% may prove optimistic given rising rates and expanded market vacancy. Tenant vacating at lease expiration creates significant re-leasing risk and associated downtime/cost.

Suggested Alternative Approach: More attractive basis closer to $250/SF would better align with market conditions and provide adequate downside protection. At revised pricing, investment would offer improved risk-adjusted returns and cushion for potential market deterioration. Remain patient for more attractive industrial investments as market conditions stabilize, particularly opportunities with in-place leases extending beyond near-term market uncertainty.