In the WSJ article, The U.S. Is Running Out of Land, a professor of finance who studies land values cites that “Land now accounts for 47% of U.S. home values…That is up from 38% in 2012 and less than 20% in the early 1960s.”
So that intrigued me and I pulled a sample of 1,315 industrial zoned parcels from Downtown Los Angeles to the City of Vernon. See below graphic. Dividing the Los Angeles County Assessor Land Value amount by the Total Assessment results in 71% of these industrial properties’ value is the land component. The Total Assessment includes improvements such as warehouse and manufacturing buildings constructed on the land.
That is a strikingly high percentage for land value but should not be surprising given the rapid increase in prices per square foot for land sales in the last decade. In the top section of the graphic, which is the DTLA Arts District, land values have ranged from $300-450/SF in recent years. In the bottom section, City of Vernon land was not long ago $50-100/SF and is now approaching $200/SF.
The Central Los Angeles Industrial Market has been an Infill Market for many years which has resulted in rapid increases in land values. If you own land in this area feel free to contact us.
If you want to have a thorough understanding of the causes for the current economic inflation, then this is the best article I’ve read on the subject recently. Christopher Thornberg of Beacon Economics has an excellent grasp of the details. Surprisingly the cause is not primarily supply chain kinks, but rather consumer demand. And Christopher details what has been driving demand and how the Federal Reserve has blundered in managing the money supply in countering inflation.
Average Asking Lease Rates have climbed dramatically in the last several years with the largest increases in 2021 and 2022. See below chart showing the steep rise for warehouse asking rental rates in Los Angeles, Orange, Ventura and the Inland Empire per AIRCRE MLS data. These are the major industrial property markets in Southern California. Individual markets and submarkets vary along with building class quality.
The Central Los Angeles industrial submarket had a very low vacancy rate of 1.4% in the first quarter of 2022. Warehouse buildings for sale or lease are hard to find for buyers and tenants as the number of listings is thin. Thus, rents and asking sale prices continue to rise. Year over year, rents rose 20% which is shocking.
There is a big change on the horizon that will significantly impact commercial real estate transactions, especially for industrial manufacturing properties with suspected contamination in the building or soil. ASTM E1527-13, entitled Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, is the nationally recognized standard for evaluating environmental risk at a commercial property during acquisition or financing.
First released in 1993, the standard has been revised in 1994, 1997, 2000, 2005, and most recently in 2013. The ASTM standards expire every eight years, and ASTM E1527-13 is scheduled to sunset on December 31, 2021. Therefore, the new standard, ASTM E1527-21, must be finalized and published sometime in 2021.
The ASTM subcommittee in charge of this process is considering updating certain key components to the standard. These changes are sure to have an impact on future commercial real estate transactions. While numerous changes are being proposed, most are relatively minor, aimed at reinforcing the current standard. A few, however, will have a significant impact on the standard.
If you have been involved in the procurement, preparation, review, or use of a Phase I ESA Report, you know the biggest concern many environmental professionals, buyers/sellers of commercial property, and lending institutions struggle with is “Are there one or more Recognized Environmental Conditions [RECs] at the subject property?”. Just what defines a REC has progressed through revisions to ASTM E1527 in an effort to clarify this most critical concern. The forthcoming ASTM E1527-21 standard will likely update the definition of a REC.
To heighten awareness, E1527-21 proposes to include Per- and polyfluoroalkyl substances [PFAS] and other emerging contaminants in Non-Scope Considerations that some environmental professionals and end-users may want to evaluate as part of a Phase I ESA report.
How long is a report good for? EPAs All Appropriate Inquiries [AAI] Rule mandates specific components to be conducted within 180 days of the date of the property purchase or intended transaction. These components are 1) interviews with owners, operators, and occupants; 2) environmental cleanup lien research; 3) visual inspection of the property and adjoining properties; 4) review of government records; and 5) declaration by an environmental professional. After one year, the entire Phase I ESA report must be updated to meet the AAI Rule.
The above text was excerpted from Omni Environmental Group.
If you own and wish to sell a suspected environmental impacted property in Southern California then please contact us so we can present it to a buyer that specifically seeks this type of commercial real estate acquisition opportunity.
Supported by the phenomenal growth of e-commerce, leasing activity was strong in the first quarter after the steep declines experienced earlier in early 2020. In Q1, across the Central Market, 139 leases were signed for a total of 2,836,295 SF; the average asking rate was $0.96 PSF. Q1 leasing volume for Central LA was 25% higher than Q1 2020 levels. Another 133 warehouse properties, totaling 2,000,000 SF, were sold in the period with an average price of $291.43 PSF. The average rate will move up or down slightly quarter-to-quarter depending on how many older, functionally obsolete warehouse and manufacturing buildings are in the pool of available inventory. The limited amount of available first-generation, Class A space leases at a premium to the average rate.
Below is a list of industrial real estate listings that were sold in the 4th Quarter of 2020 over 10,000 square feet in size in the Central Los Angeles industrial submarket. Information includes: buyer, seller, sale price, square footages, and property features for warehouses and manufacturing buildings.
Historically, the Arts District was home to industrial users who manufactured, distributed, and warehoused goods ranging from toys to frozen fish. Over time, the multi-story industrial buildings became antiquated and functionally obsolete – they began transitioning to lofts and studios for artists during the 1970’s.
Then in 1981 the Artist-In-Residence ordinance was passed by the city and it legalized the use of industrial buildings as work/live spaces for artists. During the 1990’s the area petitioned to be officially recognized as a city neighborhood called the “Arts District”.
About a decade ago, developers started converting the former warehouses into live/work lofts – starting with Barker Block Lofts, Toy Factory Lofts, and Biscuit Company Lofts. These projects helped spark a renewed interest in the Arts District, and the retailers have followed suit. Award-winning restaurants, designer apparel brands, and a multitude of breweries and cozy coffee shops make this neighborhood of mural-splashed warehouses truly unique.
The Arts District has also become a hotbed of residential and mixed-use development, with projects aimed at luring new residents to the live-work-play atmosphere of the area. The real estate players in area have shifted from private/local investors to developers with institutional funding, such as Shorenstein, Tishman Speyer, Hudson Pacific, etc. Office tenants are also vying to call this neighborhood home – Warner music Group, Adidas, Spotify and more will soon be settling into their world-class creative office spaces.
Although the landscape of the Arts District is changing dramatically, the intent of the developers and the local community is to keep the integrity, character, culture, and aesthetics intact for the most unique district of Downtown Los Angeles.
If you want to get a quick feel for the strength of the Central Los Angeles Industrial submarket, then glance at the below chart. It shows the 3 key metrics over the past decade.
The vital property statistic that I focus on the most is our low vacancy rate at just under 4%. The Southern California industrial real estate market has generally had the lowest vacancy rate in the United States over the past decade. Why? Because demand from tenants and buyers is very strong and we are an infill market given we have run out of vacant land to construct new buildings.
Here are the definitions of the other two metrics in the chart. For a complete list of commercial real estate terms defined please see our Glossary.
Net Absorption: The square feet leased in a specific geographic area over a fixed period-of-time after deducting space vacated in the same area during the same period.
Net Deliveries: The square feet of new construction delivered to the market minus any buildings that were demolished.
Don’t be fooled by the proponents of California’s Proposition 15, known as the split-roll property tax increase. If this measure passes it will devastate commercial property owners and the tenants.
How? Because hundreds of thousands of properties will be re-assessed at current market value and the annual tax bills on these will increase from $10-30k to $100-300k. Who will pay this? Well landlords with market rent may end up selling because their income may turn from positive to negative, as in a net loss.
Many landlords will try to pass off the increases to tenants since most commercial leases allow tax increases to be passed through to tenants. The tenants of course won’t be able to pay the increases and will likely default on their leases and may go bankrupt.
The CA legislature could have eliminated Prop 13 loopholes but they rejected that bill because they want to go for the big dollars in Prop 15, which will devastate the already pandemic devastated California economy. Vote NO.