Changes in consumer shopping demands are pushing retailers to strategically place their goods closer to urban centers as a method of reducing logistics costs and delivering products timely. The increasing demand for urban warehousing is impacting the industrial real estate market along the West Coast.
At the 2017 ULI Fall Meeting in Los Angeles, CoStar portfolio strategy director Rene Circ pinpointed this switch in industrial space needs over the last two decades. He described online retailers as having, “switched from competing on price to competing on convenience.” In addition to strategically positioning product, e-commerce retailers are bolstering their inventories to reduce delivery back orders and delays.
For example, Amazon continues to be a market driver nationally, and the West Coast is in no different. The retail giant continues strategically positioning distribution centers and warehouses near high population areas. In its Seattle home base, Amazon leased another 401,076 s.f. of industrial space during the third quarter of 2017. In Los Angeles, Amazon leased a 238,000 s.f. space in Buena Park. A new fulfillment center spanning 855,000 s.f. near Sacramento accounts for half of the space under construction in the region.
In our Kidder Mathews in-depth market reports, we see persistent historically low vacancy rates and an upward trend in leasing costs. Los Angeles reported available industrial space was at 4.3 percent in the third quarter of 2017. The asking lease rate was $0.86, up 10 cents per s.f. from the previous year. Silicon Valley reports show a 1.91 percent vacancy rate in warehouse properties, with strong demand for small to medium-sized industrial space. Consequently, the average leasing rate was $0.95/s.f. for warehouse space and $1.11/s.f. for industrial.
Tenant demand is especially high in the Reno market, driven by Tesla’s expansion and growth of other businesses drawn to the area’s advantages. Over 2.2 million s.f. was absorbed last quarter, and the leasing volume is increasing. Leasing rates for NNN properties increased 45 percent year-over-year, averaging $0.48/s.f.
An industrial construction boom is underway in regional hubs along the West Coast. For example, the Seattle region had 6.4 million s.f. under construction in the third quarter. Pierce County is notably active, with 10 new projects underway totaling over 4 million s.f. The report notes 4.8 million s.f. was completed in the first nine months of 2017. Delivery of new industrial space helped the vacancy rate to rise from 3.16 percent to 3.3 percent, still an incredibly low rate that continues driving the greater metropolitan area’s upward trend in leasing rates.
Seattle is not the only hotbed for industrial construction. Roughly 6.7 million s.f. is under construction right now in Los Angeles. The Portland Region ended its third quarter with 3.3 million s.f. under construction and the Oakland/East Bay region reported over 1.6 million s.f. in development.
The West Coast industrial real estate market will continue booming over the next year. Area employment and population growth are projected to continue growing, giving retailers an incentive to strategically place their goods in markets like Los Angeles, Seattle, and San Francisco.