I have been running into the same question from multiple people lately. The question is, “What is Driving the Prices up in the Commercial Real Estate Market for the Los Angeles and Orange County Area?” There have been three strong factors that have been causing prices to rapidly change overnight. These factors are: increasing demand, nonexistent supply of buildable land, and strong economy. These three items have been dictating the prices of commercial real estate properties in Los Angeles and Orange County.
Business is good, which means most businesses are needing to expand. Most of the deals I have been involved in have been clients that are running out of space in their existing commercial real estate property, so they needed to expand or obtain additional space. Now, everyone remembers their first day in Economics 101; as demand increases, supply decreases. The surge of this new demand has caused the supply of available buildings to drop significantly. The Los Angeles Mid Counties area is hovering around historic vacany lows for industrial warehouses, hence the prices are sky rocketing. A lot of tenants have been receiving “sticker shock” as their show them the new market prices for buildings. The reason tenants are have not noticed the price increase is because most tenants are on long term industrial leases, so more than likely their leases could be more then 30% below market.
Nonexistent Supply of Buildable Land
If you live or work in Los Angeles or Orange County, you know there is almost no vacant land available for commercial real estate. The available land that could be used for development is not the best. Years ago, it use to be if there weren’t enough buildings in the market place, then a developer would build a BTS building to satisfy a tenant. This worked out great for both the owner of the building and the tenant. Fast forward to today, that option is not there anymore. A lot of the new developments we are seeing are old manufacturing buildings being torn down to build warehouse distribution buildings. This requires a lot of capital on hand compared to a BTS scenario.
What is the result of this? The result is an ever decreasing amount of supply of buildings with demand remaining to grow without new development being present to satisfy the demand. Commercial Real Estate investors can not supply new developments to tenants. Therefore, tenants are stuck waiting for a possible building to come on to the market. This has a direct effect on the prices because the landlord’s have all the control. We are seeing this now in today’s market everyday.
We have been experiencing an upward trending economy since 2010. The market has recovered since the fallout of 2008 and has been experiencing rapid and robust growth since. Businesses are now hiring more people, producing more products, and selling more products. All of this has had a strong carry over to the Commercial Real Estate market. We can see this in the sales of Owner-User buildings. The prices of these commercial real estate properties have increased exponentially over the past few years. Owner-Users are willing to pay top dollar to own their own facility. This shows us that their business is strong enough to support paying soaring prices for commercial real estate properties. This has caused the prices to sky rocket because sellers know there is a prospective buyer out there willing to pay a generous sum for their building.
The current commercial real estate market in Orange County and Los Angeles is remaining strong. Increasing demand, the nonexistent supply of buildable land, and the strong economy have all played a vital role in the increasing price of Commercial Real Estate properties. How much longer will these prices keep rising? What are your thoughts?
Finding a building in a tight market is extremely hard. Please call or contact me if you are currently looking for an industrial warehouse in the Los Angeles and Orange County areas. I would love to help you and your company find their next location.
-Kevin Romano, INCO Commercial Brokerage, Senior Associate
(714) 521-0800 Ext. 2