Following the pandemic-era distortions that sent demand for industrial space into a boom-time frenzy, industrial real estate transactions adjusted to a recession fever in 2022 — the pivot year.
The pricing cycle this time around has peaked and will pick its way downward until property pricing for sale or rent bottoms. Industrial development and buyer interest in 2023 are stalled. Borrowing costs have risen and the demand for additional space has suddenly become an alert reality.
The spike in 2022 went back to normal but higher mortgage interest rates caused buyer purchasing power to tank. In a quick response, buyers of all real estate types were willing to pay lower prices due to either:
- rising capitalization rates; or
- the reduced capacity to borrow capital.
Compared to Q4 2021, industrial sale and lease transactions in Q4 2022, was down:
- 38% in Orange County;
- 39% in Los Angeles; and
- 58% in the Inland Empire, according to Voit.
However, Southern California Q4 2022 industrial vacancy rates
- 1.08% in Orange County, down from 1.35% a year earlier;
- 1.41% in the Inland Empire, up from 1.02% a year earlier; and
- 1.86% in Los Angeles, up from 1.32% a year earlier.
In Northern California, San Jose transitioned into an adjustment position for their commercial real estate, including industrial, as the overall fall in prices equated to a whopping 7.5% drop during 2022, according to MCSI Real Assets.
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Transparency in commercial real estate
However, these numbers are only telling a part of the story.
Many available commercial properties are hiding in pocket listings — exclusive listings with an intentionally delayed release, if ever, into the multiple listing service (MLS) environment of industrial brokers. By taking on a pocket listing, brokers have fewer views on their client’s properties due to an “in-house” only selection of people being exposed to them.
Pocket listings minimize the potential for a sale or lease. Initially, recent past pricing and inventory figures prevailed to distort decisions by buyers and tenants. But, within six to 12 months, all property transactions began to be reported. Only then did it become publicly well known that selling or leasing was taking place at lower prices and on less favorable terms. The market was surprised by greater vacancies than had the properties been released as available in the MLS environment, which is open to competitive analysis among all brokers and agents and all buyers and tenants.
The result of pocket listings is an artificial support system that sustains deceptively higher prices for a short period. In turn, pricing is subjected to a sudden accelerated drop to correct itself. The discovery of the actual inventory facts and prices drives pricing below a pricing trend line that an open market experience avoids.
Further, disclosures in the real estate industry has taken a turn in 2022 — an improvement in transparency for buyers and tenants. Asymmetric distribution of information equals the playing field for pricing.
Before 2022, sellers were often able to get away with thin and untimely property disclosures. Agents were taking this path into unpredictable risks under the cover of historically low inventory and high demand — but all these dynamics have changed.
In today’s buyer’s market, property disclosures have greatly improved, becoming more thorough and complete to keep serious buyers interested. More importantly, brokers and their agents are fulfilling their duty to disclose facts of interest to buyers and tenants as they set the prices they will pay.
Transparency covers you and everyone involved, especially during a time when sales volume and pricing will decline and likely bottom in 2025 and 2026.
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