The Expert: Have Los Angeles’ Industrial Real Estate Fortunes Set Sail?

Global trade is a major driver of industrial real estate demand. Nowhere is this more apparent than in the Los Angeles Basin, the United States’ gateway for trade with Asia. LAX ranks third in the nation in international air cargo and first in trade with Asia. The ports of Los Angeles and Long Beach comprise 35 percent of the country’s container trade, and the region accounts for more than 12 percent of the nation’s trade by volume.These strong ties to global trade and Asia’s growth markets have driven unprecedented demand for industrial real estate in recent years. Between 1997 and 2007, The Port of Los Angeles saw container volume increase by almost 300 percent and the industrial market saw some of the highest absorption rates in the country and enjoyed the lowest rate of availability of any major market in the nation. These factors drove record rent growth during much of this period.But Los Angeles’ trade fortunes have turned dramatically. As of October 2008, year-to-date container traffic was down 1.7 percent in the region, driven by a drop in imports of 9.2 percent for the year.This decrease can be attributed to several factors:Labor negotiations & congestion uncertainty—Shippers often diversify shipments in times of uncertainty, and though labor contracts went relatively smoothly this year, shippers braced for a worse outcome and diversified some shipments to other ports.Port regulations & fees—The ports of Los Angeles and Long Beach have some of the highest imposed or proposed regulatory fees—including PierPass, infrastructure and clean air—in the industry.All water service to East Coast—A shift in trade routes for cost savings and diversification.Economic recession & Southern California’s housing bubble—Global economic growth is plummeting. The World Bank forecasts a fall in global trade in 2009. Recent data from China even shows imports and exports shrinking considerably.Los Angeles and Long Beach will continue to lose market share, though not at the current rate. Many factors now affecting volume at the ports will have less of an impact and will in some cases reverse in coming quarters. AMB Property Corp. expects container trade growth to resume in 2009, though more slowly than in recent years. So far, the trade collapse has had a limited effect on many Los Angeles industrial submarkets.