Lease rates climbed, mortgage interest rates fell, and we had our busiest year ever – join us for a look at our biggest learnings and wins from 2019.
We predicted a year ago that Southern California’s industrial property market would maintain the status quo, which meant that vacancy would remain extremely low, rents and sales prices would keep moving higher, and despite political tensions at home and global economic challenges abroad, business decisions would be made with an optimistic slant.
For the most part, that turned out just the way we expected. Our team had our busiest year ever, completing 90 leases and 22 sales, despite tight market conditions.
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One thing we did not anticipate was the return of mortgage interest rates to an historic low point. The Fed cut its Fed Funds Rate three times during the year, and that brought the yield down on the 10-year Treasury bond, the primary benchmark for setting mortgage interest rates. That was welcome news for buyers and sellers, as the lower cost of capital helped to absorb the impact of the steady increase in sales prices.
Lease rates moved up again during the year, but tenants and buyers became even more discerning in terms of building quality. If they have to pay top dollar they want top quality, functional space that will help them operate more efficiently. That focus increased marketing time for properties offered for lease only, as many of them are older with varying degrees of functional obsolescence. Properties offered for sale still moved quickly throughout the year, as long as they were properly priced.
Landlords were no less picky than their prospective tenants in 2019. They continued to take advantage of the low-supply environment by pushing for longer leases, better credit and nominal tenant incentives. One very interesting change during the year was the narrowing gap in lease rate based on size range. Historically, smaller spaces have commanded disproportionately higher rates, but property taxes, the main operating expense component, have moved sharply higher in larger buildings that have recently changed hands at record prices. We are currently marketing a 200,000-square-foot building with a $.26 per square foot per month property tax pass-through to the eventual occupant.
Looking forward we see a mixed bag of economic and political forces that could significantly influence business decisions going forward. Key economic indicators bode well for 2020. US GDP growth is holding in the low 2% range, which is enough to keep the current recovery going. Unemployment is at a 60-year low and wage growth, especially in the lower tier, is running well ahead of inflation. That has boosted consumer spending heading into the new year.
Add the fact that trade tensions have eased with the signing of a preliminary agreement with China and the finalization of the USMCA, a long-anticipated replacement for the outdated NAFTA treaty. The easing of tariffs on a wide variety of goods should give Southern California a welcome boost, given the fact that more than a third of US port activity takes place at the ports of Long Beach and Los Angeles.
The General Election in November is perhaps the biggest wild card in our market outlook. Upcoming elections often slow down decision making and ratchet up uncertainty, but this time around there may be more at stake, as the policy differences between our current president and any of the Democratic Party’s candidates are at opposite ends of the political spectrum, especially when it comes to taxation and the regulatory environment. If the polls indicate a tight race after primary season, we can expect to see tenants, buyers, sellers and landlords take more of a wait-and-see approach.
To sum up or take on 2020, we expect “slightly less of the same”. By that we mean that lease rates and sales prices will keep moving higher, but at a more moderate pace, and businesses will remain in growth mode, but with a greater focus on controlling occupancy costs. The number of actual transactions will decline again this year and less functional space will take longer to lease or sell.
On behalf of the entire Zehner Davenport Industrial Group, we thank you for your continued support of our efforts. We continue to expand our platform of tools and resources, so that you remain confident in your decision to choose us as your real estate advisor. If we haven’t had that the opportunity to serve you yet, we certainly look forward to doing so soon.