Industrial Market Overview

Industrial vacancy in Los Angeles has risen in line with the national trend over the past two years. However, unlike the national market, where vacancy has been driven by an increase in supply, the rise in Los Angeles vacancy is largely due to a decline in occupancy. This shift has brought occupancy rates below pre-pandemic levels. As of the fourth quarter of 2024, vacancy reached 5.9%, up from a historic low of 1.7% at the start of 2022. This marks the 11th consecutive quarter of negative net absorption, with spec developments in the region often delivering vacant space.

Of the nearly 10 million square feet of new industrial space completed since 2023, 40% remains unoccupied. The net absorption rate over the past year has been negative, with a loss of 13.7 million square feet, primarily due to downsizing by logistics tenants and manufacturers. This trend follows a broader pullback by U.S. businesses in 2023, which reduced inventory levels and faced rising costs. Imports to Southern California’s twin ports also remained well below the record highs seen in 2021-2022 until mid-2024.

Vacancy has been most pronounced in areas closely linked to port activity, including Vernon, Commerce, and the City of Industry. Many logistics tenants have downsized as they shift from expansion to a focus on efficiency, often vacating older, less functional buildings.

That said, there are signs that the trend of occupancy loss may slow or even reverse in 2025. Leasing activity, excluding renewals, hit over 10 million square feet in the third quarter of 2024—marking the first time since 2021 that leasing volume has surpassed this threshold. Both retailer inventories and imports to the Long Beach and Los Angeles ports are increasing, and inflation pressures appear to be easing.

Although a significant portion of the 6.2 million square feet currently under construction—more than 80% of it—will likely remain vacant upon delivery, the ongoing demolition of outdated buildings will help limit net supply growth. Additionally, with fewer projects in the pipeline, supply is expected to moderate in 2025, which could align with a potential rebound in tenant demand.

Even though tenants are still vacating spaces into 2025, vacancy rates are not expected to climb much higher. Asking rents have fallen about 17% from their peak in 2023, marking the first rent decline in over a decade. Landlords are also offering more concessions, including several months of free rent on larger new leases. As vacancy rises above historical averages, further rent reductions could follow. However, as minimal new development is expected in the year ahead, rents could increase again in 2025, driven by tightening market conditions as demand begins to pick up.

Source: CoStar Research