Encouraged by my late father (thanks dad), I studied economics in school. Little did I know that the degree would allow me to understand things like supply, demand, inflation, markets, etc.
Inflation. Much on this subject has been written, voiced, commented upon and dissected recently. Of course, inflation is a tax. Why, you might ask? Because if you go to your local Chevron, insert your debit card, open your tank and fill it up, you’re shocked at how many gallons $20 will buy.
It wasn’t that long ago – like at the start of 2020 – gas prices were hovering around $3 a gallon. Now? North of $5 at some stations. Simple math tells us that gasoline is now 42.8% more expensive! Have your salaries increased by 42.8%? Yeah, I didn’t think so. So with a little more on your salary this year – say 4.5% – and with one of the things we often buy – gasoline – 42.8% more expensive – your take home pay has been “taxed” by a gasoline company. Because, quite simply, your dollars are fewer and your purchasing power has diminished.
A similar bump is occurring with the sale prices of industrial real estate.
During the Great Recession in 2009 and 2010, similar things were brewing. If you were driving on East La Palma Avenue in East Anaheim, one of our industrial area corridors in Northern Orange County, you would have encountered approximately 22 buildings over 50,000 square feet available for sale.
Average asking selling prices at the time were $75 to $80 per square foot. So you could buy a 65,000 square foot building for just under $4.9 million. Recently, a similar sized deal closed at over $25 million! For those who score at home, it’s an increase of 37.2%!
What about rents? Consider an example in the Inland Empire East, the area east of I-15 including the towns of Riverside, Perris, Moreno Valley, San Bernardino, Colton, Rialto, Fontana, Beaumont, and Banning.
Massive amounts of new construction took place in this corridor as vacant lots abounded and demand for bigger, bigger and well-equipped logistics space prevailed. After all, what you buy on Amazon has to be stored and distributed from one place.
Just four years ago, prevailing market rates were around $0.40 per square foot. Therefore, 250,000 square feet meant a check to the homeowner for $112,000 per month. Now? That same 250,000 – if you could find one, by the way – would require $250,000 per month! An increase of 123% over four years or 30.8% per year.
So what does this bode for owners and occupiers of industrial real estate in Southern California?
As predicted in the darkest days of the financial crisis, the worm will spin! Idiomatically, you say the worm has turned if someone who has accepted a lot of abuse from other people without complaining suddenly decides they won’t accept the situation anymore.
Indeed, the worm has seen the light. The owners are enjoying an unfathomable increase in their fortunes, as predicted 11 years ago, but to an extent no one could have predicted. Occupiers – the beneficiaries of motivated landlords and plentiful vacancy – are experiencing soaring costs for their facilities. And expect much higher rents in the future.
Will this astronomical upward trajectory continue? In the short term, yes. I expect this to continue for two to three years. Why? Back to my economics degree studying supply and demand. With a voracious appetite for more space (demand) coupled with a limited number of available buildings (supply) and a mix of $1.2 trillion stimulus dollars, and you create a classic case of too many dollars for too few goods. This gives you a much higher price.
But, there is hope. The worm will eventually spin! She always does.