An update on how declining vacancy has impacted the Southern California commercial real estate market as of 2018.
In this week’s post we return to a topic we first wrote about back in 2015; the impact of declining vacancy on area businesses.
The vacancy rate for Orange and Los Angeles County industrial property has declined to record lows. Lack of new development and strong business growth in an improving economy have combined to bring the vacancy rate down to just 2% in both regions, posing a major challenge to businesses looking to move.
The impact of the tight market has caused a rapid and sustained rise in lease rates that few thought possible. In fact, average asking lease rates in Orange County have risen 80% from their low back in 2010. The Mid-Counties area of Los Angeles County has seen a similar increase, finishing Q2 of 2018 at $0.85 IG. Since rent is one of the biggest line items in most budgets, the higher cost of doing business in these markets can have a major impact on profitability.
Sales prices have risen even faster than rents, mainly due to low interest rates for SBA loans, which insulate owner/users from even higher occupancy costs in the future. The availability of properties for sale is approaching zero in most size ranges and prices have more than doubled since this current economic recovery began.
However, the real impact to area businesses has more to do with a loss of efficiency than it does higher rents. A disproportionate share of the industrial inventory offered for sale or lease is older and functionally obsolete. So, many businesses are left without the opportunity to upgrade and end up renewing existing leases in properties that no longer fit their needs. This limits opportunities for revenue growth that could impact the bottom line more than the increase in rental rates.
While there is no guaranteed solution, acknowledging the problem is a critical first step. Starting your search sooner is a must. When the right building hits the market, even if it overlaps with your existing lease, be ready to pull the trigger.
Paying double rent for a few months could be your least expensive alternative, as counter-intuitive as that may sound. You may also want to look for other operating efficiencies relative to your layout, racking plan and workflow that will allow you to adapt to a building not optimized for your use.
The problem is not likely to go away and will likely get worse before it gets better.
Without the construction of new inventory, which is remains at a near standstill, it will take a major market correction to push vacancy above 5%, and there is no clear indication of that happening soon. So, we recommend that you always be looking. Stay in touch with the market and be ready to modify your real estate strategy if an unexpected opportunity comes your way.