Southern California’s Hot Warehousing Market Is Cooling Off

Date: Friday, August 11th, 2023
Source: Wall Street Journal

Logistics companies are finding something in Southern California they hadn’t seen in several years—empty warehouse space.

One of the tightest industrial real-estate markets in the country is showing signs of loosening, industry experts say, as soaring rents, limited empty space and plummeting import volumes drive companies to look elsewhere for warehouses.

The warehouse vacancy rate in a logistics-heavy region called the Inland Empire jumped to 3.8% in the second quarter from 1.2% a year earlier, according to real-estate services firm Savills. That is still below the nationwide vacancy rate of 4.8% but a sharp reversal from a yearslong contraction that left one of the country’s busiest warehousing markets effectively full.

More warehouse space became available during the past quarter than was leased, the first time that has happened in the Southern California market in two decades, said Mark Russo, head of industrial research at Savills.

“We’re seeing a cooling and normalizing of demand levels in Southern California, particularly Inland Empire, at the same time that a significant amount of new supply is hitting the market,” Russo said.

The uptick in warehouse vacancy in the region comes as the industrial real-estate market nationwide is cooling off after three years of feverish leasing and development driven by skyrocketing imports of goods to meet strong e-commerce demand during the pandemic.

U.S. trade by value this year has been wavering, with overall imports down 4% in the first half of the year, and the impact has been hitting especially hard in Southern California, a major gateway for inbound trade flows, particularly goods from China.

The ports of Los Angeles and Long Beach, which feed goods into the region’s sprawling warehousing operations for distribution in Southern California and across the country, handled about 1.3 million fewer containers, measured in 20-foot equivalent units, in the first six months of this year compared with the same period in 2022, according to port figures.

With fewer televisions, sofas and appliances in the pipeline, companies are no longer rushing to take in storage space and have put their leasing decisions in the region on hold, casting a cloud over industrial real-estate markets heading into what is normally the busy fall shipping season.

“SoCal is the canary in the coal mine for the U.S. industrial market to some extent,” Russo said.

Prologis, the world’s largest builder of logistics properties, said vacancy at its warehouses in Southern California rose in the second quarter. The warehouse developer reduced its rent growth forecast for the region for this year.

Prologis Chief Executive Hamid Moghadam said the Southern California market is being buffeted by the declining port volumes and by the region’s high costs. “There is more price sensitivity now because it’s a very, very expensive market,” he said on a July 18 earnings conference call.

Many companies in the past two years shifted cargo from the Pacific Coast to ports in the East and South to avoid bottlenecks amid labor negotiations with West Coast dockworkers. East and Gulf coast ports today handle a much greater share of import container volume than before the pandemic.

Logistics operators also have opened new warehouses in nearby areas such as Phoenix, where more space is available and rents are lower. The average asking rent in Phoenix in the second quarter was $9.96 a square foot compared with $17.35 in the Inland Empire.

Even with vacancy rates rising, warehouse availability in Southern California remains tight by historical standards. Prologis says its warehouses were 97% occupied in the second quarter, down from 99% last year but still at a level the company considers fully occupied.

“Do I worry about Southern California becoming a difficult market? No, I would like to have more Southern California,” said Moghadam.

[Read from the original source.]