Notes from our Industrial Research

Industrial Building Rents

Rents are declining from pandemic highs. The rent range for greater Los Angeles (including property taxes) is $1.00 per foot for older spaces to over $2.50 per foot for newer bulk space. More space is available in almost all size categories. Smaller spaces are rare due to the higher cost to build. One note for the South Bay. Rents are lower in The Gardena/County Strip area because of RV encampments, concerns of employee safety, and local government failure. Rents are highest in the LAX, Beach Cities, and LAX where there is high-tech manufacturing, defense and airfreight.

Property Taxes

Property Taxes have a big impact on rents. At one time, property taxes were only a few cents per square foot (psf) but with a rise in property values, it’s common to see up to $.50 psf once properties are reassessed. It can be 25% or 30% of your total rent. Due to Proposition 13, when a property is sold, taxes are re-assessed at the new value and that increase is normally passed through to tenants. Looking at the chart below, lowest taxpayers are almost always longtime property owners, families or partners.
High taxes are more common because of the long investment boom since 2010.

Power

Tenants seeking heavy power, 2000 AMPs or greater, will face delays of twelve (12) months or greater because electrical switchgear and transformers are on back order. Many tenants are seeking EV chargers which increases load. In some parts of town, vandals strip vacant buildings of electrical breakers and copper wiring making the buildings inoperable. The graph below shows there is an ample supply of buildings with sufficient power. Many buildings with the most power will lack the most modern features since they date back from L.A.’s manufacturing past. Developers are installing large panels in their new buildings.

Industrial Sale Market

The 20-year Treasury is at 4.9% and mortgage loans are over 8%. These relatively high rates have put considerable restraint on an investor led boom throughout industrial Los Angeles. With many investors sidelined, owner/users have the opportunity they were waiting for to buy. Even at current mortgage rates, the loan payment approximates the amount you would pay for rent. Loans are prioritized for long term credit tenants and not risky investment deals. You will find the large acquisition funds willing to sell off their less desirable assets.

Jim Klein, SIOR a 40-year background of industrial real estate brokerage and investment in the Los Angeles area. Our specialty is representing corporations and local landlords. While we practice in Los Angeles, we have moved many customers out of state with help from our SIOR colleagues throughout North America. Klein Commercial recently added new sales staff, IT and analytics to our brokerage service. Please consider us for your next industrial real estate deal.

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Sales Leaseback – In Demand

Depending on the market cycle, there are different courses of hot money looking for deals. In times of distress, there are opportunity buyers. When interest rates were low (and negative), funding was rampant. Even now, select investors are fundraising with new rounds. 1031 buyers are another category of buyers with immediate funds.

Currently, Sale leasebacks are hot for both buyers and sellers. Buyers will pay more for buildings with 10  or 15 year leases in place. Corporates and owner-occupiers, most facing higher business interest rates, can look to their owned real estate to raise lower cost financing in a Sale leaseback transaction

There are generally three different types of sale leasebacks:

The first is an Absolute NNN lease with no landlord responsibility including casualty and condemnation. The tenant keeps paying rent no matter what. It has elements of a corporate bond in its reliance on the tenant’s credit.  A Credit Tenant Lease (“CTL “) is for critical manufacturing, distribution, or infrastructure for a long term lease with a rated tenant.

The second form of Sale Leaseback is used to raise cash for lower rate financing or for other financial engineering reasons. Owner users and corporates can unlock years of “unrealized” equity. There are often balance sheet advantages. Sale Leasebacks are routine with private-equity owned businesses. Pricing is closely related to the tenant’s credit rating.

The third type of Sale Leaseback is in name only. Because either the lease term is short or tenant credit is weak, these deals are more fully underwritten on the real estate. Tenant term and credit is less a factor than building quality and market acceptance.

When interest rates were low, long-term leases held down the value because of rapid rent increases they were forgoing. In a reversal and because of tighter bank lending standards, long-term credit leases are now valued more than empty buildings.

Sale leasebacks are a common tool in the CEO playbook. We are equally qualified to handle conventional industrial building sales, leases, and investments. Klein Commercial, with a 40-year history of industrial real estate, is growing. We recently hired two new sales agents, an IT manager, and a data scientist to improve and expand our business. We can help with any industrial property assignment in Los Angeles and elsewhere in the United States.

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