It was a textbook case of supply and demand. That’s what drove industrial real estate rents sky-high in greater Los Angeles in 2022. And the effects may ripple all the way down the supply chain to shippers moving freight through the Ports of Los Angeles and Long Beach.

 

To sum up exactly what happened:

  • Where industrial real estate—including warehouse space—was concerned, 2022 was a landlord’s market with very few vacancies.
  • As a result, rent in Los Angeles rose in 2022, both for new tenants and existing tenants.
  • Additionally, to compensate for inflation, some landlords added consumer price index (CPI) increases on top of rent bumps.
  • To help defray these growing costs, warehouses will likely raise their prices for utilizing their services and their storage space.

By and large, these factors are out of most people’s control. However, there is one strategy you can use to reduce your exposure to some of these rising costs: cross-docking. We’ll explain exactly what it is—and show you why it can help mitigate your exposure to this perfect storm.

 

First, let’s take a closer look at the real estate market behind these escalating rents.

Why Did Rents Rise for Industrial Real Estate in Los Angeles?

A number of factors came together to continue to drive industrial real estate rents to all-time highs in 2022—including those for warehouse space—in the greater Los Angeles area.

Factor #1: Low Vacancy Rate

First and foremost, there simply wasn’t much availability. According to data from CBRE’s Greater Los Angeles Industrial Figures Q3 2022 report, the vacancy rate for industrial properties in the greater Los Angeles area has been below 1% since Q2 of 2021. In other words, that’s six quarters of sub-1% availability.

Availability of Industrial Real Estate in Greater Los Angeles

(Source) 

With vacancy low and demand high, landlords could easily raise rent, and tenants wouldn’t have much recourse. Even if they wanted to go through the trouble of relocating, there hasn’t been much availability—and that probably won’t change significantly in the near future. 

Factor #2: New Construction Remains Uncertain

Given the high demand for industrial space in greater Los Angeles, it would seem like the perfect opportunity to add to the area’s industrial footprint via new construction. However, economic headwinds and supply chain issues delayed progress on that front in 2022.

 

A hike in interest rates, plus a continued climb in construction costs, gave some developers pause. Additionally, supply chain issues created delays in receiving materials. In a Commercial Observer article, some developers reported waiting 12-16 months for materials that would ordinarily take 3-5 months to arrive. The backlog continued into late 2022, extending to items like security systems, delayed for lack of crucial semiconductors, which have remained scarce globally.

 

Additionally, while 3.1 million square feet of industrial space was under construction coming into 2022, 42% of it was already preleased, according to a CBRE report, further underlining just how tight the market was in 2022.

 

In other words, it doesn’t look like new construction is poised to solve the space squeeze in Los Angeles anytime soon.

Factor #3: Inflation

On top of all of this, add the issue that affected consumers and business alike in 2022: inflation. To make up for overall rising costs, some Los Angeles landlords added Consumer Price Index (CPI) adjustments on top of their fixed annual rent escalations, as reported by CBRE in their Greater Los Angeles Industrial Figures Q3 2022 report. This only drove costs for warehouse operators higher in 2022. 

The Results?

Industrial rents in greater Los Angeles hit all-time highs in 2022. CBRE tracked a rise in rents for nine consecutive quarters—starting in Q2 2020 through Q3 2022—with the average industrial asking lease rate hitting a record of $1.54 psf in Q3 2022. According to a Q3 2022 report from Avison Young, some landlords were even asking in excess of $2.00 psf triple-net.

 

A Q4 2022 report from the commercial real estate firm Kidder suggests the upward momentum may moderate in 2023, as vacancy rates experience a slight increase. However, as they note, industrial real estate still remains of the most sought-after property types in L.A. County.

2022 Nationwide Trends in Warehousing Capacity & Rents 

Los Angeles isn’t the only market that felt the squeeze where warehouse space was concerned. Availability nationwide has been trending downward as far back as 2009, according to commercial real estate brokerage firm Savills. 

0%
Quarterly growth in U.S. warehouse rent

Additionally, the New York Times reported that rents nationwide grew at an average of about 3% per quarter from mid-2020 through mid-2022. In 2022, Silicon Valley and Long Island, New York saw rents in similar ranges to those in Los Angeles. 

Additionally, storage rates in a few regions have risen sharply, notably in the Southwest, where rates increased by 53% year over year from May 2021-May 2022.

 

In other words, in 2022, warehouse operators across the U.S. faced a similar rise in their cost of doing business. The effect was particularly pronounced in the Los Angeles area, home to the two busiest ports in the U.S.

 

As the effects of these rent increases ripple down the supply chain, shippers may see their own costs impacted—unless the market moderates significantly.

If you’re facing increases in your logistics costs, we’ll look at a strategy that may make a difference in this area.

Rising Warehousing Costs—and What You Can Do About It

Given the perfect storm of circumstances in the greater Los Angeles area, it’s likely that prices for storage will rise. If you’ve been using a warehouse near the Ports of Los Angeles or Long Beach, your bill may go up soon—if it hasn’t already.

To shield yourself from some of these costs, there’s a logistics strategy you might want to consider.

Cross-Docking: What It Is and How It Can Save You Money

What better way to insulate yourself from rising storage costs than to reduce your storage use? That’s where cross-docking comes into play. Cross-docking is a logistics strategy that will keep your freight moving quickly out of the Port of Los Angeles or Long Beach and onto an outbound method of transportation with minimal sitting-around time.

To give you a sense of how cross-docking works, let’s look at an example. Let’s say you send a less-than-container load of six pallets of goods to the Port of Los Angeles.

  • Your freight forwarder picks up the container, brings it back to their warehouse, and removes all the pallets, including yours.
  • Instead of putting your pallets in their warehouse, your forwarder puts the pallets right on another dock.
  • Shortly afterward, a truck pulls up to that dock, and your forwarder puts those pallets on the truck.
  • Your goods head to their final destination, perhaps your own warehouse or a retail outlet.

In other words, in a cross-docking scenario, your goods spend as little time in your forwarder’s warehouse as possible. As a result, you’ll minimize your storage costs, reducing your exposure to rising warehousing costs in Los Angeles.

What’s the Best Way to Take Advantage of This Strategy?

Talk to your freight forwarder. We work with our clients to create solutions just like this that increase efficiencies, keep freight moving, and reduce costs. Cross-docking is just one option, and our experts have a whole roster at their fingertips that they’d be happy to share with you.

If you’d like to talk further about reducing your supply chain costs, request a complimentary consultation. One of our experts will set up a time to take a holistic look at your supply chain. Then, they’ll work closely with you to come up with a logistics plan that’s right for your business—and your budget.

 

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