NEW CONSTRUCTION ONCE AGAIN DRIVES ABSORPTION. DRAYAGE AND LAND COSTS ESCALATE. More than 1.9 million square feet in net occupancy gains this quarter came from new construction delivered since 2017. The quarter s top move-ins included Glenair (529,179 square feet across two facilities in Arcadia) and UPS (478,596 square feet in La Mirada). Vacancy was under 2.0% for the 19 th consecutive quarter, while annual rent growth occurred for the 26 th straight quarter. The average asking rent is at an all-time high. It is up 5.4% from one year ago and exceeds last cycle s peak (reached in 2008) by 12.3%. The average lease-up time for an existing Class A warehouse over 100,000 square feet is four months. There are only 10 existing Class A warehouses with 100,000 square feet or greater available on the market. Containerized cargo volume at Southern California s seaports hit a record high in 2017, with 11.9 million loaded TEUs. 2018 was off to a strong start with 2.0 million containers in January and February. Port volumes in March may be lower than last year: With Chinese New Year starting in mid-february, factories in Asia pushed their shipments forward before production plants closed. It takes many companies as long as a month to hire new staff and restart their production lines after the holiday. E-commerce will represent 17.0% of total U.S. retail sales by 2022. Demand for quality in-fill space to reach Los Angeles consumers is as high as ever. Rents will continue to climb, as vacancy is incredibly tight, new construction is limited, and drayage and development costs are both increasing. Drayage Costs Are on the Rise Transport costs, which comprise 50.0% of the average distributor s overhead, are quickly rising because of peak cargo volumes, limited trucking availability and general roadway congestion. For instance, the cost to move one 40-foot container from Southern California s ports to the city of Commerce averages $437, an 18.8% increase from one year ago. Rates in the Inland Empire are far steeper at $571 to $755. Higher transport costs cut into a distributor s bottom line, meaning occupiers will continue to pay a rent premium for quality space near the ports, since real estate costs are typically just 5.0% of the equation. Market Analysis Asking Rent and Vacancy $0.80 $0.73 $0.66 $0.59 $0.52 $0.45 0.0% 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 Net Absorption Square Feet, Millions 6 4 2 0-2 -4 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 Market Summary Average Asking Rent (Price/SF) Vacancy (%) Construction and Deliveries Square Feet, Millions 10.0 8.0 6.0 4.0 2.0 Current Quarter Prior Quarter Year Ago Period 12 Month Forecast Total Inventory (SF) 992M 987M 982M Vacancy Rate (%) 1.1% 1.1% 0.9% Quarterly Net Absorption (SF) 2.4M 1.6M -124,076 Average Asking Rent ($/SF) $0.78 $0.76 $0.74 4.0% 3.2% 2.4% 1.6% 0.8% 0.0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Under Construction Deliveries Under Construction (SF) 2.8M 4.4M 7.1M Deliveries (SF) 2.3M 2.0M 655,755
Construction Activity is Slowing For Now Under construction activity was down 60.3% from one year ago. This will likely slow future absorption gains in the coming quarters. Developers are scouring the market for building opportunities, causing valuations of development and redevelopment sites to double in the past 24 months. Historically, land acquisition accounts for 30.0% to 40.0% of warehouse replacement costs. This figure is now topping 50.0% in some submarkets. Functional obsolescence can be an issue in a market where the average warehouse facility has a 1977 construction date. Modern product with higher ceilings to stack product, wider column spacing to accommodate material handling equipment and large yard space for extra trailer parking is an easy sell and can command up to a 30.0% rent premium. This covers higher replacement costs due to pricier land values. Outlook Vacancy will hover near 1.0% this year, as rents, particularly in the warehouse/distribution segment of the market, scale to new heights. Key drivers, including Los Angeles consumer base of 10.1 million residents, a healthy labor market, increasing retail sales, the ongoing push by e- tailers to achieve next-day (and same-day) delivery and rising drayage costs, all benefit Los Angeles industrial market. YTD Import Volume YTD Loaded Inbound Cargo, TEUs (Thousands) 1,600 1,400 1,200 1,000 800 Payroll Employment Total Nonfarm Unemployment Rate, Not Seasonally Adjusted 15.0% 12.0% 9.0% 6.0% 3.0% 600 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Ports of Los Angeles and Long Beach 0.0% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Los Angeles-Long Beach-Glendale Source: Port of Los Angeles, Port of Long Beach Source: U.S. Bureau of Labor Statistics Lease/User Transactions Tenant Building City Type Square Feet GlenAir 12339-12359 Lower Azusa Rd Arcadia New 529,179 Shason 5525 S Soto St Vernon Sublease 506,580 Fashion Nova 12588 Florence Ave Santa Fe Springs New 403,653 Tempur Sealy 825 Ajax Ave City of Industry New 327,778 RIM Logistics 12418 Florence Ave Santa Fe Springs Pre-lease 312,000 Select Sales Transactions Building City Sale Price Price/SF Square Feet Randolph Business Center Commerce $92,700,000 $232 400,169 Peck Centre City of Industry $51,001,000 $178 286,094 202 N Nash St El Segundo $43,100,000 $387 111,238 Commerce Business Center Commerce $42,100,000 $144 291,413 4490 Ayers Ave Vernon $18,050,000 $190 94,769 2
www.ngkf.com Submarket Statistics Total Under Total Qtr YTD WH/Dist General Ind Total Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF) Bell 3,755,475 0 0.0% 21,515 21,515 $0.87 - $0.87 Bell Gardens 2,339,824 0 2.9% 0 0 $0.65 $0.73 $0.66 Commerce 52,559,907 0 0.3% 124,450 124,450 $0.53 $0.62 $0.55 Cudahy 828,184 0 0.0% 0 0 - - - Downtown Los Angeles 130,591,853 115,000 0.9% -18,374-18,374 $0.89 $1.01 $0.92 Huntington Park 4,871,540 0 2.0% 22,590 22,590 $0.49 $0.61 $0.56 Lynwood 3,815,722 0 0.0% 0 0 - - - Maywood 764,938 0 0.0% 0 0 - - - Montebello 13,441,148 0 0.1% 133,625 133,625 $0.64 $0.66 $0.64 Pico Rivera 10,801,428 0 1.9% -159,018-159,018 $0.72 - $0.72 South Gate 11,356,478 0 0.0% 0 0 - - $0.76 Vernon 60,915,515 400,662 1.3% 540,042 540,042 $0.67 $0.68 $0.67 Central 296,042,012 515,662 0.8% 664,830 664,830 $0.71 $0.85 $0.74 Artesia 308,193 0 0.0% - - - - - Buena Park 14,477,805 0 0.1% -12,090-12,090 $0.82 $0.82 $0.82 Cerritos 14,952,135 70,696 0.6% 0 0 $0.73 $0.75 $0.71 Downey 4,294,733 0 0.2% 0 0 $0.53 $0.89 $0.60 La Mirada 14,269,928 0 0.4% 585,522 585,522 $0.78 $0.68 $0.76 La Palma 2,083,684 0 0.0% 0 0 - - - Norwalk 3,577,431 0 0.3% 0 0 $0.63 $0.93 $0.80 Santa Fe Springs 54,855,091 899,955 1.3% 159,866 159,866 $0.69 $0.79 $0.77 Whittier 4,232,968 0 0.0% 0 0 - $0.65 $0.65 Mid-Cities 113,051,968 970,651 0.8% 733,298 733,298 $0.75 $0.77 $0.76 Central Valley 31,838,177 0 0.2% -23,368-23,368 $1.08 $0.93 $0.96 Conejo Valley 14,559,167 195,046 3.5% -64,538-64,538 $1.10 $0.90 $1.00 East Valley 56,659,618 0 0.1% 151,943 151,943 $0.92 $1.18 $1.10 Santa Clarita 25,025,538 378,657 3.3% 40,288 40,288 $0.71 $0.65 $0.70 Simi/Moorpark 13,711,101 0 1.4% 985 985 $0.81 $0.87 $0.91 West Valley 42,711,841 0 1.4% -101,170-101,170 $0.72 $0.84 $0.82 LA North 184,505,442 573,703 1.2% 4,140 4,140 $0.74 $0.82 $0.84 Central SGV 26,394,077 0 4.5% 209,718 209,718 $0.80 - $0.80 Eastern SGV 33,156,673 74,052 0.4% 40,298 40,298 $0.70 $0.69 $0.70 El Monte Area 18,379,443 0 1.0% 14,963 14,963 - $1.10 $1.10 Industry Area 89,195,751 345,793 1.0% 529,588 529,588 $0.74 - $0.72 Western SGV 11,953,203 0 2.8% -9,950-9,950 - $0.93 $0.93 LA East (San Gabriel) 179,079,147 419,845 1.5% 784,617 784,617 $0.73 $0.72 $0.73 3
www.ngkf.com Submarket Statistics (continued) Total Under Total Qtr YTD WH/Dist General Ind Total Inventory Construction Vacancy Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF) Carson 40,473,607 190,651 0.8% 29,427 29,427 $0.75 $0.70 $0.74 Compton/Rancho Dominguez 40,985,637 0 1.3% 3,686 3,686 $0.75 $0.73 $0.74 El Segundo 10,003,260 0 0.4% 98,442 98,442 - $1.43 $1.43 Gardena/110 Corridor 34,118,573 151,642 0.5% -3,280-3,280 $0.74 $0.75 $0.75 Hawthorne 10,149,010 0 0.2% 0 0 $1.01 $0.83 $0.91 LAX/Inglewood 11,397,707 0 0.6% -33,001-33,001 $1.33 $1.30 $1.31 Long Beach/Signal Hill 18,213,622 0 1.5% -13,014-13,014 $0.73 $0.95 $0.87 Paramount 9,410,887 0 0.2% 2,025 2,025 $0.78 $0.68 $0.70 Port District 6,541,495 0 1.4% 14,130 14,130 - $0.79 $0.97 Redondo Beach 3,577,501 0 0.3% 0 0 - - $2.50 Torrance Area 34,654,387 0 2.0% 128,774 128,774 $0.87 $0.82 $0.88 South Bay 219,525,686 342,293 1.0% 227,189 227,189 $0.82 $0.81 $0.83 Los Angeles 992,204,255 2,822,154 1.1% 2,414,074 2,414,074 $0.75 $0.81 $0.78 4
Downtown Los Angeles 700 S Flower St Suite 2500 Los Angeles, CA 90017 213.596.2222 Los Angeles Industrial Submarkets West Los Angeles 1875 Century Park East Suite 1380 Los Angeles, CA 90067 310.201.2060 South Bay 2301 Rosecrans Avenue Suite 4100 El Segundo, CA 90245 310.491.2000 San Gabriel Valley 13191 Crossroads Pkwy N Suite 555 City of Industry, CA 91746 562.364.2000 Corporate CA RE #: 01355491 Dain Fedora Director of Research 213.596.2245 dain.fedora@ngkf.com Norma Llamas Database Coordinator 310.491.2001 nllamas@ngkf.com Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are also available at www.ngkf.com/research All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Knight Frank (NKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient s choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains.