LA’s insatiable demand for warehouses begins to engulf suburban office parks

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LOS ANGELES (CN) — In the aftermath of the Covid-19 pandemic, Los Angeles County is seeing the first glimpses of a transformation in the suburban landscape where the dreary office campus, as parodied in the 1999 cult classic ” Office Space”, is place for industrial warehouses.

With many office workers slow or unwilling to give up working from home due to lingering concerns about Covid, childcare needs and transportation costs, office vacancy rates in LA County are remained stubbornly high and rental rates, especially for lower-end offices, are flat if not falling, according to data from commercial real estate firm CBRE.

At the same time, the pandemic has caused an online shopping boom, fueled by locked-in consumers spending on household goods, as well as online retailers and shipping services, who want their goods as close as possible. possible millions of buyers in the most populated areas. in the United States, have taken up all available warehouse space for their “last mile” delivery needs.

As a result, the industrial vacancy rate has fallen to 0.5% in the Los Angeles area, and rental rates for warehouse space in the county are now the highest among metropolitan areas in North America. This in turn prompted real estate investors and developers to start scouting for underutilized office parks, on land already zoned for industrial use, to redevelop into warehouses once the leases of the remaining office tenants expired. .

“The industrial market has never been stronger,” said Barbara Perrier, investment broker at CBRE, who specializes in industrial and land sales. “Land prices have gone up by more than 50% and people are saying, ‘Where else can we go?’ »

Trying to convert outdated commercial spaces into industrial warehouses is very difficult due to resistance from municipalities, according to Perrier, and there is little or no vacant land available to build on. This leaves industrial land on which offices have been built as a prime alternative.

It has simply become more lucrative to own a warehouse in parts of LA County rather than a partially occupied office building where the landlord is stuck with rising fixed costs and no way to increase rental rates, said Michael Longo who manages the sales of property belonging to institutions. at CBRE.

“Office rents in secondary suburban markets have held steady,” Longo said. “There has been an acceleration of pre-existing trends that the pandemic has thrown a lighter fluid on.”

Rexford Industrial Realty, a real estate investment trust, or REIT, specializing in Southern California industrial properties, paid $42 million in February for an office complex on 10 acres of land in Chatsworth, a northern suburb of LA County. The building is partly leased to the county, but once the lease expires, Rexford will redevelop the site and set up a warehouse.

At the other end of LA County, a unit of Canadian multinational Brookfield paid $36 million in March for a newly renovated 125,000 square foot two-story office building in Torrance to eventually replace it with warehouses.

Representatives for Rexford declined to comment on their acquisition and Brookfield did not respond to requests for comment.

It will mainly be the large REITs that have both the funds and the long-term game plan to buy office campuses on industrial estate land to redevelop into warehouses later, because an investor must be prepared to wait too long as 5 or 7 years for office tenants to move out, said BJ Turner, founder of Dunleer, a Los Angeles-based industrial real estate investment and development firm.

Besides Southern California’s huge consumer market, the main driver of demand for warehousing space in the region is the presence of the largest US container port complex in Los Angeles and Long Beach, which handles approximately one third of US imports arriving by ship. , mainly from Asia. Here too, the pandemic has fundamentally changed the way importers manage their overseas supply lines.

Due to pandemic-related lockdowns, American consumers have shifted their spending habits from traveling and dining out to shopping online for furniture, home electronics and exercise equipment, most of which are shipped across the ocean from Asia. The resulting surge in imports clogged Southern California ports last year because there weren’t enough trucks and trains, workers or warehouse space to handle it all.

Last year’s supply chain collapse spooked retailers and other large importers who are now not only trying to beat the rush by ordering new goods from Asian manufacturers more in advance, but are looking also more space to store extra inventory once it gets to the docks.

Retailers have been forced to move away from a “just in time” approach to bringing in goods, which minimizes the amount of inventory they keep on hand, to a “just in case” strategy to avoid be left without, said Jonathan Gold, vice president of supply chain and customs policy for the National Retail Federation. This forces them, or their external logistics providers, to have much more warehousing capacity.

Some retailers are now dealing with excess inventory because they got some of their seasonal merchandise too late, according to Gold. At the same time, they are already bringing in inventory for the upcoming holiday season, in part because they fear further disruption at ports related to ongoing labor negotiations between the stevedores’ union and terminal operators.

“We are now in peak shipping season,” Gold said. “Many retailers have mitigation strategies in place to bring in the goods early and everything has to go somewhere.”

And it’s not just retailers trying to navigate a new and uncertain landscape when it comes to their overseas supply chains. Manufacturers are also rethinking their globalized model and “relocating” some of their operations due to the uncertainty they have experienced with the closure of their overseas factories due to Covid and the inability to visit their factories in due to travel restrictions, according to Dunleer’s Turner.

“Many companies want to have more control over their manufacturing,” Turner said. “It’s going to require more warehouses.”

Other regional trends that have contributed to the exponential increase in demand for warehousing space are new industrial users, such as “ghost kitchens”, which are restaurants without dining rooms for food delivery companies. online meals, and cannabis producers, according to Turner.

Given the penetration of e-commerce, especially post-pandemic, when even the most tech-averse consumers turned to online shopping for everything from groceries to furniture, the demand for space in warehousing in the Los Angeles area isn’t expected to decrease any time soon. And with the recent rise in fuel prices, proximity to customers has become even more important.

“Fifty percent of supply chain costs are related to transportation, so you have to be very close to the consumer,” Turner said. “With $7 for gas, and even more for diesel, it becomes even more crucial.”

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