Category Archives: Market Trends & Indicators

Market trends, leading or lagging indicators. As it relates to industrial property.

Commercial Property Insurance Update

As with any insurance market, the commercial property insurance market is constantly evolving, with new trends and challenges emerging that can impact both insurers and policyholders alike. Across the country, there have been several regulatory changes in recent years that have added costs and increased compliance requirements for insurers in this space. Specifically in California, there has been an increase in non-renewal notices as many insurance companies withdraw from the marketplace, most notably in Los Angeles County but also throughout the entire state.

California has become one of the most difficult places to write insurance, so many carriers are exiting the market, reducing capacity, or only looking to insure best-in-class buildings.

Risk. Concern has grown over the incidence of natural disasters including wildfires, flooding, landslides, and earthquakes. This has caused premiums to further increase and caused reinsurance costs to be passed down to policy holders.

Insurers also consider a property’s likelihood for litigation and heightened number of claims. Multi-family is considered high risk because the human factor by nature yields an increased frequency of claims. The same can be said of retail shopping centers where there is increased foot traffic. In essence, the more people, the more claims. Industrial buildings and office properties, on the other hand, are considered moderate to lower risk, unless they have a very high vacancy rate which can make them susceptible to theft.

Building Age: In Los Angeles where the building stock is aging, the preferred market prioritizes either structures built within the last 30 years or those with records reflecting regular maintenance and upgrades. Insurance companies don’t inspect properties every year, which can have unfavorable outcomes for buildings that go several years without review. For example, many carriers are shying away from Los Angeles’ Downtown and Garment District because of the high incidence of claims coming from older buildings that haven’t been kept up. A lot of these older buildings are being placed on the Excess and Surplus Market (E&S) when the risk is too high to insure, which results in higher rates, and in some cases, limited coverage.

Here are some strategies:

  • Maintain accurate records. Well-kept documentation is the best tool an owner can have to prove the maintenance and renovation of their property. Remember: to secure a carrier in the preferred insurance market, the building does not have to be new, but the systems must be up to date. A 100-year-old building can get placement if inspections and records reflect optimal maintenance.
  • Check your online presence. These days, Google is the number one underwriting tool for insurance companies other than classic in-person visitation. If you haven’t already, Google your building to see what an agent will see online, then take action to improve your property’s virtual presence. This might mean removing encampments, replacing a roof, and cleaning away graffiti.
  • Practice preventative maintenance. If you don’t have a regular and consistent maintenance plan in place, it could lead to higher rates. Keep in mind that many industrial buildings were constructed 40 years ago or more, which puts them at the tipping point when it comes to insurance. Carriers are looking very stringently at buildings that have not been well maintained, but making regular improvements can improve your odds of good coverage.

High Land Value As a Percentage of Total Property Value in Los Angeles

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.

Understanding Current Economic Inflation

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.

Below is the linked article.

What the Fed’s Rate Hike Means… and Doesn’t Mean (beaconecon.com)

Rising Lease Rates

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.

Changes to ASTM Standards for Environmental Due Diligence in 2021

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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.

Market Snapshot 2021-Q1

Central Los Angeles industrial submarket overview with absorption and vacancy rate.

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.

Sold Warehouses Q4-2020 in Los Angeles

Map of sold buldings

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.

Arts District of DTLA

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”.

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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.

VItal Property Stats – The Past Decade

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.