Los Angeles Area Warehouse Vacancies Hit Highest Level In A Decade

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Warehouse vacancies in the Los Angeles area have hit their highest levels in a decade, according to real estate brokerage Colliers. 

The news is another troubling indicator that the commercial real estate sector is facing a stormy, uncertain future. The Colliers report revealed that both the short- and long-term trends for warehouse rentals are heading in the wrong direction.

The average warehouse vacancy rate in Los Angeles for the first quarter of 2024 is 4.1%, — 1.5% higher than the first quarter of 2023. Many warehouse owners must offer rent discounts or are netting lower costs per square footage than in past years, which only complicates matters. Landlords are dealing with higher vacancies and getting less money on the leases they do sign.

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That these troubles are hitting the Los Angeles market is cause for even greater concern from industry observers. Los Angeles is the nation's leading warehouse market because it holds many of the goods that arrive in the Ports of Los Angeles and Long Beach, two of the busiest ports in the country. 

Struggles in the warehouse industry are a contrast from just a few years ago during the COVID-19 pandemic when consumers began buying goods online in greater volume than ever. That led to an elevated demand for warehouses and a tight rental market that didn't have enough space to meet it. As investors rushed in to meet demand, a mini-boom in warehouse construction ensued.

As is often the case when a large amount of new inventory hits the market, the rush from investors to get in on the warehouse boom led to an oversupply of space. The oversupply problem was exacerbated by inflation, which slowed the pace of international trade just as consumers were beginning to return to retail stores. Those factors combined are a perfect recipe for creating a slowdown in the L.A. warehouse market.

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The news isn't any better in the Inland Empire, a lucrative submarket that grew out of L.A.'s shadow in recent years. During the mini-boom, the Inland Empire was a vital warehouse center that featured numerous logistics centers serving the e-commerce industry. As that business has slowed, the Inland Empire's vacancy rate has climbed to 6.2% — the highest since 2013.

Under most circumstances, commercial real estate must hit an occupancy rate between 95% and 97% to cover expenses and generate profits for its owners. With the L.A. rate at 4.1% and the Inland Empire at 6.2%, two of America's major warehouse hubs are missing projections. The scariest part of this scenario is wondering where the bottom is. If this is a slight dip and the warehouse market rebounds by the end of the year, most investors will recover.

However, if this is the beginning of a larger trend that sees warehouse vacancy rates surge to multidecade highs like the office market, it will mean another commercial real estate sector is in deep trouble. That's probably the last thing real estate investors want to hear.

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