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Southern California Industrial Market Outlook
Southern California's Industrial Attraction With a warehouse stock just over 1 billion square feet, the market is twice as large as Chicago, the next largest warehouse market. Southern California's industrial availability rate currently stands at 5.8%. Net absorption in the region has far surpassed all other markets, with 33 million square feet of warehouse absorbed in 2006. This is 22.0% of the national demand for warehouse space. In addition to being served by the nation's largest ports, Southern California has a local market of 16 million consumers and statewide population of 35 million, creating a large regional market as well. With strong rent growth and very high total returns over the past couple of years, it is no wonder then that Southern California remains the preferred market for industrial real estate investors. But will Southern California be able to maintain its current pace as it faces land constraints and a slowing economy? With container traffic expected to continue growing, there is an anticipation that demand will continue in the Southern California region. TEU growth in the ports of LA/Long Beach was 11.0% in 2006 and is anticipated to grow at a rate of 8.0% to 10.0% annually over the next few years. Ocean carriers are creating an increased demand for industrial real estate in Southern California, with an increase in orders for large ships that are too big to navigate the Panama Canal. There are more than 250 vessels anticipated to enter the global fleet through 2010 that will carry at least 6,000 TEUs; about 150 of them will carry at least 8,000 TEUs.
Total Returns in Southern California Have Been Very Strong Over The Past Two Years
Sources: NCREIF, Torto Wheaton Research. Demand has been strong and imports have surged over the past couple of years, as have the prices of industrial real estate at seaports on all three coasts. The result is that better deals can be found at inland locations; however, developers are still willing to pay a premium for properties close to the ports and this is particularly true in the Southern California region. Total annual returns for the area topped 25% in 2005 and 2006, whereas returns for all TWR markets were 17.0% and 12.2%, respectively. New development does not show any abatement in Southern California; however, rising transportation costs are raising location questions for developers: how far from ports and consumer markets is too far to locate a million square foot warehouse? New supply has been and will be increasing in the Southern California region; and 70% of the area's new space is to be concentrated in Riverside. Los Angeles County has been built out for some time and the western portion of Riverside, where the largest buildings are located, is also scarce on space. New development is pushing farther East in the Inland Empire, despite the rising transportation costs. Overall, TWR believes that, given weakness in the economy and consumer demand, in addition to new area supply, Southern California's strong returns of the past two years will not continue in 2007 and 2008. Total returns will still outperform the nation, but the strong returns of the past couple of years are simply not sustainable for the long-term. Net absorption is anticipated to stay on track and rent growth will outpace the nation. Overall, the area remains the most sought after for industrial real estate in the country. Return from Southern California Industrial to Market Watch
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