Feelings vs. Fundamentals of the Market
Buzz on the Street
Whether a large portfolio or individual property sale, industrial buildings in Southern California continue to trade at high price levels. Furthermore, opportunistic owners or sellers continue to push values for properties they will sell if they can “get their number.” But the buzz on the street from Buyers (and Tenants) resembles a more cautious optimism. While still optimistic about future growth both in their business and in long-term property values, Buyers and Tenants are seeing some flattening in the price appreciation curve and are less willing to aggressively chase deals by repeatedly increasing their offering price. Quality industrial property in convenient locations still receives strong interest from the market, but there may not be three (3) or four (4) serious qualified buyers at the table, as we have experienced over the past few years, especially on offerings pushing the upper limits on price.
When you look at the key fundamentals of the Southern California Industrial market, they remain strong both in the near and long term. Indicators such as strong demand for new and second generation industrial space, new construction not outpacing demand, interest rates remaining historically low, the vacancy rate persisting low, and business growth and expansion in general all point to long-term sustained local market strength. The primary drivers of the markets’ strengths are E-commerce, a stable and thriving customer and employee base, overall strong local demographics, proximity to the port of Los Angeles/Long Beach, and a resilient manufacturing base. The primary factors restricting additional growth are generally lack of available land; cost (building materials and land); or regulation, taxes and fees from the municipalities. Despite the challenges of ever-growing regulation and the cost to their businesses as a result, there remains a resilient manufacturing base in the region that continues to create demand for third and fourth generation industrial space (in contrast to modern high ceiling distribution space), thus minimizing the number of functionally obsolete buildings and keeping overall vacancy even lower.
This market has been cooking hot for 5+ years now, and the overall market recovery is pushing 10 years. Given historical cycles, there is a general “feel” out there that “we are just due for a correction.” While eventually that is true, the real questions are when and what type of correction?
Everyone wants to know if this is the right time to buy or sell. Ultimately that timing depends on your unique situation and is subject to further discussion. But remember, those who thought we were due for a correction in 2017 may have missed out on a huge opportunity to see significant appreciation over the next 2+ years. It is also important to remember that when you are buying a property with plans to occupy or hold that property long-term, you will have more protection against near term market swings. For example, owners who bought in 2007 at the height of the last market cycle may now have realized 15% appreciation over 2007 levels (subject to adjustment case by case). Everyone’s time table and situation is different, but being near the top of the market should not stop you from buying.
What to Do Now?
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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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