President Joe Biden recently brokered a deal to unload cargo at the Port of Los Angeles around the clock, a first step to speeding up the backlogged supply chain that’s stranded dozens of container vessels off the Southern California coast.
But that’s just the first step. More truck drivers and chassis and more warehouse space are needed to move goods out of the ports and to their final destination.
The pandemic boosted the demand for online shopping, creating a shipping backlog that experts fear will limit the supply of goods for shoppers this Christmas.
Distribution issues come atop an existing shortage of industrial space in the region, and in particular, warehouse space.
Amazon and other retailers have been on a shopping spree across Southern California, looking to expand distribution centers.
Redlands economist John Husing said operating the ports 24 hours a day, seven days a week will create significant challenges in the Inland Empire’s vast system of warehouses.
“The whole system is clogged,” he said.
J.C. Casillas, managing director of research for commercial real estate brokerage NAI Capital, said the growing demand for industrial space since the pandemic is driving up rents and driving down vacancy rates.
We asked him to explain how this demand is affecting warehouses and other industrial properties in the region. His comments have been edited for space.
Q: President Biden unveiled a plan Oct. 14 to expand operation at the Port of Los Angeles to ease the backlog of container ships waiting off the Southern California coast. Do warehouses in the region have the capacity to handle all those goods?
A: I hear a lot of warehouses are overflowing. Certainly, our agents as they go out, that’s one of the things they look for, seeing what their yards look like. Do they have a lot of cargo sitting outside and need additional space? So the answer is yes, you hear a lot of that.
The market in Southern California is 1.7 billion square feet. The vacancy rate is 1.7%. So, you’ve got extremely tight market conditions. If you don’t have enough space, you have to quickly ship it to your clients and go through the same hoops as the ports.
Q: Industrial space is usually the cheapest property type with the lowest rent. Does that mean people are converting industrial space to other uses, like housing, to get a better return?
A: Yeah. When you’re looking at a certain price per square foot for industrial that has been zoned for residential, that can drive its value up two or three times more, depending on where it’s located. The base (of industrial property) has kind of shrunk as a result of it going to residential uses.
SoCal has suffered from a shortage of modern industrial space for years. However, the market is responding by building larger, modern facilities, which take time to build. Modern warehouses are key to efficiently moving goods through the supply chain, from warehouse distribution centers to retail outlets.
Old facilities that may have been built for manufacturing and don’t have the column spacing and certainly not the yard space. A modern facility, with 32-foot clear heights, a truck-turning radius where a truck can do a 180-degree turn, really brings efficiency to the marketplace.
Q: When did this log jam begin?
A: As orders increased (during the pandemic), additional warehouse space was needed and demand for warehouses shot up. However, some businesses struggled with getting existing goods out to make room for new orders due to a shortage of trucking service providers.
Pre-existing conditions, including chassis shortages and dislocations, challenges truckers face returning empty containers to the port terminals and labor shortages at warehouses had already created inefficiencies in the supply chain.
Q: How has this affected the industrial market?
A: You’ve got double-digit rent increases year-over-year for distribution space. If you’ve got a lease renewal today, think about the impact of your lease rate going up exponentially from where you were just five years ago. It’s going to be pretty expensive to renew.
Q: Is there enough construction to alleviate this shortage?
A: There’s about 30 million square feet under construction in Southern California. Seventy percent of the industrial space under construction is in the Inland Empire, as far Banning, 95 miles from the ports.
Remember, the other 50% of cargo unloaded at the ports is put on a train or truck bounded elsewhere, like out of state. At the end of the day, a lot of that consumption is here locally. Fifty percent of the cargo unloaded at the ports is bound for local markets.
Q: How long will this shortage of industrial space continue?
A: It’s probably going to be around for a while. A shortage of industrial space will persist due to land constraints, limited infill opportunities, and large new buildings moving farther east. The depletion of scarce pockets of infill land will continue to drive up redevelopment, rent, and sale prices.
J.C. Casillas Profile
Title: J.C. Casillas, Managing Director, Research
Organization: NAI Capital Commercial
Residence: Mar Vista
Education: University of Southern California
Previous experience: Started at Grubb & Ellis in 1998 and worked in commercial real estate research since
Industrial market facts
Vacancy: 1.7% in the third quarter, down from 3.3% 15 months earlier.
Third-quarter annual rent growth
L.A County: 13%
Orange County: 13.9%
Inland Empire: 5.6%
Share of regional distribution space:
L.A County: 46.1%
Inland Empire: 39.8%
Orange County: 10.6%
Ventura County: 3.5%
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