In this year two of the pandemic, we have experienced a dramatic continuation of businesses across most sectors expanding their E-Commerce platform and delivery channels. End users and consumers are also growing more comfortable “throwing off the shackles” of having to go to the store to get something they need and now quickly turn to the computer or phone to order a wide variety of home goods and even food. As a result of all this activity rental rates, land values, and building prices have appreciated significantly. For example, land values alone have nearly doubled in some instances over the past 12 months. Depending on the property, lease rates and sales prices have also increased some 20-40%. Yet with all this appreciation, demand has not slowed down at all, but rather increased. Both large institutional owner and local business owners have both continued to absorb (purchase or occupy) nearly everything that is available, and they do so in short order.
Lately, what everyone is talking about is the supply chain challenges. Here in Southern California, we have grown accustomed to the scenery of mega-container ships lining the horizon. But due to limited available industrial space, even if all those containers could off-load today, there would not be enough available space locally to store all those goods. But this supply chain problem is not just a dilemma caused by limited truck drivers or dock workers or lack of available industrial space. Rather, it has been caused by the ripple effect of overall production being reduced during the pandemic. The real problems in the supply chain persist from two sources: on one hand, too many goods are trying to flow through the system and we don’t have the capacity, while on the other hand not enough goods or raw materials are available, from food to electronics, to produce the end products consumers need.
Furthermore, at the higher levels of government, California, just over a year ago, avoided the dramatic negative effects of the proposed changes to California’s “Prop 13,” which protects property owners from annual reassessment of their property taxes based on current property valuations. So far the federal government has not made any changes to the IRS 1031 Tax Deferred Exchange rules or general capital gains tax rate, although the current administration would like to change both. Finally, the federal government, over the past 18+ months has brought about the actual or planned injection of trillions of dollars of new money into the market, creating an inflationary environment and negatively impacting the value of the US Dollar. This additional capital in the market will further put upward pressure on prices as more capital continues to chase fewer resources, including industrial property. And throughout all that has transpired over the past 18+ months, the interest rates have not been increased, although plans to do so in 2022/2023 loom large.
So now the question: “What should I do in 2022?” And the answer, as always, is “It depends.” We anticipate 2022 will bring some of the same trends, and, as always, a few surprises along the way. Whether we see more government spending, changes to the tax rules, increased pandemic related issues, greater supply chain constraints, and/or continued price appreciation via inflation, one thing we can plan for is that industrial space will play a pivotal role in addressing these challenges and creating opportunities. We are here to help you evaluate what is most important in your decision-making criteria so we can identify what it really “depends” on for you, and then formulate and execute a strategic plan for your success.
Christopher J. Destino, SIOR, a Principal at Lee & Associates, is an engaging, responsive professional who enjoys working closely with his clients and helping them succeed.
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