Demand Outruns Supply in West Coast Industrial

With e-commerce expanding into uncharted territory, the industrial sector is beginning to look cycle-proof as it reaps the benefits of this expansion. Nowhere is this more evident than in the major West Coast markets, where vacancies are generally in the low single digits, despite an influx of new construction.

A report from Kidder Mathews shows that vacancies in eight of 12 major markets were down at year-end 2017 compared to 12 months earlier. The current construction pipeline in seven of those 12 markets is fuller on a year-over-year basis, flat in three others and down in only two. Meanwhile, asking rents are up Y-O-Y in nine of the markets.

In terms of vacancies, it’s hard to go much lower than Los Angeles, which finished 2017 at 1.8%. “Industrial development in L.A. is typically characterized by persistent demand and slow supply growth, creating one of the strongest, most stable markets in the nation,” according to Kidder Mathews.

However, each of the region’s industrial markets has a growth story to tell. For example, Reno is gaining momentum as its economy diversifies beyond its traditional base of trade on the one hand, and tourism/hospitality on the other.

Although the current supply pipeline of 54.3 million square feet will add just 1.8% to West Coast industrial inventory of about 3.1 billion square feet, Kidder Mathews pointed out that the sector is experiencing higher construction velocity than any other product type. Moreover, 2018 will be a test as new supply comes on line at record-breaking levels.

“Demand is forecast to decline slightly in 2018, relative to the past two years,” according to the report.“This, coupled with a robust development pipeline, may put upward pressure on vacancies going forward.”

Yet, West Coast industrial just might shrug off the added pressure, judging by the sector’s track record in the past few years. There have been double-digit Y-O-Y rent gains, and although annual deliveries have grown each year since 2011, demand continues to outpace the rate of new supply coming onto the market.

Vacancies in most markets finished 2017 near or at historical lows. Absorption last year exceeded 47.6 million square feet across the region, up about 20% from the previous cycle’s peak.