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In Market: Southern California with Jay Tanjuan

Southern California Trends

The Southern California industrial market will be just fine in the long term. A series of unique demographic and economic features make the area a powerhouse for long-term potential, such as:

  • Southern California’s GDP is $1.8 trillion, representing 7% of the U.S. total business. Only Texas and New York have larger economies. In fact, Southern California would rank as the world’s 11th largest economy if it was its own country.
  • Southern California has a population of about 24 million people.
  • The Port of Los Angeles and Long Beach combined are the largest ports by volume in the US. 40% of all of the goods coming into the US pass through these two ports.
  • CBRE projects that by 2032, e-commerce’s share of total retail will be 32%, which is a significant increase from its 21% share today.

Each incremental $1 billion in e-commerce sales growth leads to an additional 1.25 million square feet of distribution space. Therefore, over the long term, warehouse demand will be significant, and a good portion of this demand will be in Southern California.

However, in the short term, the 2-billion square foot Southern California industrial market is facing some significant headwinds. The Fed increased the fed funds rate in March 2022, and 11 more times since then. This rapid rise in the fed funds rate caused quite a disruption to the capital markets and threw commercial real estate into a recession. While the overall economy is not yet in a recession, commercial real estate saw values drop, leasing velocity decline, sales dry up, tenant demand decline, supply increase, cap rates expand, lease rates fall, and vacancy rates increase.

Over the last decade, the Inland Empire market was considered by many to be the best performing market in the United States, averaging 51 lease transactions per year for buildings 200,000 SF and higher per Colliers International. Yet in 2023, the total was only 29 lease transactions.

In Q2 2022, the Inland Empire’s 650-million square foot market was at an all-time low of 0.1%, which was the lowest industrial vacancy in the entire world at the time. Now it sits at 5.2%. This is the highest it has been since Q1 2013 when it was at 5.6%.

It is easy to be negative about the way things are today, but if we focus on all of the things that make Southern California industrial great, we know this too shall pass. Trees don’t grow to the sky. Markets don’t fall forever. As Howard Marks, co-founder and co-chairman of Oaktree Capital, once said “…unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime.”