Over the past three years, the California industrial market has been a beacon of hope, with consistently high occupancy rates and superior rental rate growth. According to the Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey Winter 2022 Survey, optimism has reached its highest level in the past seven years. To understand what’s happening in the industrial space, Alain R’bibo, real estate partner at Allen Matkins, and Barbara Perrier, vice president of CBRE, break down some of the top trends in the industrial market.

1. DEMAND FOR SPACE WILL CONTINUE TO EXCEED SUPPLY

Demand for industrial space in California is at an all-time high due to a combination of strong retail sales and supply chain challenges. Businesses want to keep inventory on hand, not just to ensure just-in-time delivery. They are dealing with a public that has lost faith in the country’s delivery systems. R’bibo and Perrier agree.

“The supply chain challenges are real,” Perrier says. She adds that buyers are looking for goods to maintain an inventory “just in case”. Last year, the amount of leased space increased by 1 billion square feet. Many of those leases were for five years, further evidence that suppliers don’t believe supply chain issues will be resolved soon. They want their product to be available on land, ready when their customers want it.

R’bibo points out how the backlog at ports has underscored the need for industrial space. “Companies don’t need to stock so many products if they’re confident they’ll pass.” Unfortunately, the backlog has reduced that confidence, so consumers want to stock even more products locally.

2. SURPRISINGLY LOW VACANCY RATES DRIVE DEVELOPMENT IN THE INTERIOR AND NORTH

Californian markets benefit from new developments. Vacancy rates in Los Angeles and the Inland Empire are below 2%. In Sacramento and the East Bay area, vacancy rates are between 3% and 4.5%. As a result, developers are looking for more land. Perrier points out that the Inland Empire has already filled up, so people are looking elsewhere.

“They’re pushing into the desert and the high desert,” says Perrier, noting increased interest in Banning, Palm Springs, Palm Desert and Victorville. Land prices have doubled over the past year, making it difficult for developers to find large chunks of land. Additionally, rights issues are increasing development time, causing some developers to look to the Arizona and Nevada markets.

R’bibo warns that delivery cannot go too far beyond the city’s borders, despite the growing amount of industrial space available on the outskirts. “Companies still have to deliver their products to consumers at a rapid pace,” he points out. Therefore, urban infill markets can help meet some of these needs to keep the product closer to the final destination.

3. BUILDING CONSTRUCTION ADAPTS TO ARTIFICIAL INTELLIGENCE

Labor shortages have forced companies to find alternatives to human capital, and many are turning to artificial intelligence and robotics to meet their needs. This forces changes in building construction and design, including higher headroom, more cubic storage area, and flatter floors inside buildings.

Perrier shares, “Companies need flat ground to accommodate the robotics they use instead of human capital.” But, she adds, “We’re also seeing an increased need for higher clearance rates, in some cases up to 40 feet for tall buildings.” To accommodate increased shelving height, buyers are looking for a space with more cubic storage area.

According to R’bibo, the types of technology implemented inside industrial spaces can vary greatly as it depends on the user. In general, he noted that buyers use custom shelving systems and robotics to maximize overall space utilization.

4. DEMAND FOR INDUSTRIAL SPACES DOES NOT SEEM TO SLOW DOWN

Industrial buyers may wonder when demand will slow, but construction of new industrial space looks set to continue for several years. The majority of Southern California and Northern California panelists plan to start at least one new development within the next year. Half of them have plans for more than one new project.

R’bibo says demand won’t slow as long as consumer demand for products via delivery and online platforms holds. “There are no signs of slowing down,” he adds. The market remains strong and will continue to be in the future as developers continue to work at a breakneck pace to bring enough industrial products to market.

“It’s the perfect time to be an industrial broker,” Perrier quips. With cap rates compressing and land values ​​and rents rising, Perrier saw huge opportunities in the market. The only threats seem to be inflation and rising interest rates. Still, she is quick to point out that “next year could be even better.”

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 62