Encouraged by my late father (thank you, Dad), I studied economics in school. Little did I know, the degree would provide me with an understanding of things such as supply, demand, inflation, markets and the like.
Inflation. Much about this subject has been written, opined, commented upon and dissected recently. Sure, inflation is a tax. Why, you might ask? Because if you go to your local Chevron, insert your debit card, pop open your tank and fill ‘er up, you’re shocked at how few gallons $20 will buy.
Not long ago – like in early 2020 – gasoline prices were in the mid $3 per gallon range. Now? North of $5 at some stations. Simple math tells us gasoline is now 42.8% more expensive! Have your wages increased 42.8%? Yeah, I didn’t think so. So, with slightly more in your paycheck this year – say 4.5% – and with one of the things we buy often – gasoline – 42.8% more expensive – your take-home pay has been “taxed” by a gas-selling corporation. Because, quite simply, your dollars are fewer and buying power decreased.
A similar bump is occurring with industrial real estate sales pricing.
During the Great Recession in 2009 and 2010, similar things were brewing. If you drove down East La Palma Avenue in East Anaheim, one of our industrially zoned corridors in North Orange County, you’d have encountered approximately 22 buildings larger than 50,000 square feet available for sale.
The average asking sale prices back then were $75-$80 per square foot. Thus, you could buy a 65,000 square foot building for just under $4.9 million. Recently, a similarly sized offering closed at more than $25 million! For those scoring at home, that’s an increase of 37.2%!
What about rents? Let’s use an example in the Inland Empire East, the area east of I-15 including the cities of Riverside, Perris, Moreno Valley, San Bernardino, Colton, Rialto, Fontana, Beaumont and Banning.
Massive amounts of new construction have occurred in this corridor as vacant land abounded and the demand for taller, bigger, well-equipped logistics space prevailed. After all, that stuff you buy on Amazon must be stored and distributed from some place.
Only four short years ago, prevailing market rates were in the mid $.40s per square foot. Therefore, 250,000 square feet meant a check to the landlord for $112,000 per month. Now? That same 250,000 – if you could find one, by the way – would require $250,000 per month! A 123% increase over four years or 30.8% per year.
So what does this portend for owners and occupants of industrial real estate in Southern California?
As predicted in the darkest days of the financial meltdown, the worm will turn! Idiomatically, you say the worm has turned if someone who has accepted a lot of bad treatment from other people without complaining suddenly decides that they are not going to accept the situation any longer.
Indeed, the worm has seen the light. Owners are enjoying an unfathomable increase in their fortunes, as anticipated 11 years ago, but to an extent no one could have foreseen. Occupants – the beneficiaries of motivated owners and plentiful vacancy – are experiencing a spike in their facility costs. And expect much higher rents going forward.
Will this astronomical upward trajectory continue? In the short run, yes. I expect it to continue for two to three years. Why? Back to my economics degree studying supply and demand. With a ravenous appetite for more space (demand) coupled with a limited number of available buildings (supply) and mix in $1.2 trillion of stimulus dollars, and you create a classic case of too many dollars chasing too few goods. That gives you a much higher price tag.
But, there’s hope. The worm will eventually turn! She always does.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
