Strength of Industrial Market, Cautious Optimism in Most CRE Sectors Drives Discussion at Los Angeles Business Journal Commercial Real Estate Forum
On February 17, the Los Angeles Business Journal held its annual Commercial Real Estate Forum, during which leading experts in the industry weighed in on the state of the office, industrial and development and how the market will be impacted in 2021. Klabin’s Managing Principal, Frank Schulz III, SIOR, served as one of the panelists. Here is an overview of the insight shared on the key sectors in CRE.
We’ll start with industrial. It continues to lead the charge and 2021 may be the biggest year ever for the sector. As Frank points out, industrial is a “12” on a scale of 1 to 10, but other sectors are lagging. Retail, office and hospitality have catching up to do, hence the theme of the Forum: “Optimism with Caution.”
But back to the strength of the industrial market. The national industrial vacancy rate is four percent, while L.A. hovers below two percent. This has led to a rapid increase in rents as demand is high and inventory is low. We’re seeing a shift in institutional capital from office and retail into industrial. Local brokers are seeing an uptick in private and institutional buyers pursuing transactions on the lower end of the market (below $10 million). Foreign investors, many who are on a sector learning curve, are pouring money into the L.A. industrial market, while private investors are assembling funds to buy industrial assets. Moving ahead, we’re going to see more strip malls converted into last mile distribution centers and reverse logistics facilities to handle the large volume of online purchases that are returned. In today’s market, the location of an industrial property is much more important to a user than it once was. Users want buildings that are closer to end users, labor pools and have access to a power supply that can handle automation needs.
The office sector is off to a tough start in 2021, but there has been increased interest and engagement in the L.A. Basin over the last four to six weeks. Entertainment and content creation will drive the recovery in the L.A. office sector. The demand for sound stages is way up and this is a trend to watch. Overall, the panelists were bullish on the workforce returning to the office. While the look and feel of offices may be different than before, certain industries, such as big tech, need the draw of a top-notch physical environment and in-person mentorship to attract and retain top talent.
As for real estate development, with the exception of industrial, the construction pipeline is down for the first time in years. Contractors are bidding jobs more competitively, driving pricing down as these firms look to maintain a project backlog. On the flip side, bank loans are becoming difficult and delays due to environmental regulations and lack of appraisers is a problem. While lenders don’t have much of an appetite for ground-up projects, there is plenty of capital available for repurposing, especially for creative and studio space. Residential development will continue to thrive, especially considering that 52 percent of millennials are still living at home, representing a big future consumer pool. One developer on the panel, Lendlease, is banking on semi-urban areas its dubs “15-minute cities,” meaning you can get everything you need in 15 minutes or less.
If you would like to explore any of these topics further, please contact Frank at FrankS@Klabin.com.