37.2% Inflation?

Image Attribution: www.shutterstock.com 

Encouraged by my late father - thank you, Dad - I studied economics in school. Little did I know, the degree would provide me with an understanding of things such as supply, demand, inflation, markets and the like. Inflation. Much about this subject has been written, opined, commented upon, and dissected recently. Sure. Inflation is a tax. Why you might ask? Because if you go to your local Chevron, insert your debit card, pop open your tank and fill ‘er up - you’re shocked at how few gallons $20 will buy. Not long ago - like in early 2020 - gasoline prices were in the mid $3.00 per gallon range. Now? North of $5.00. Simple math. Gasoline is now 42.8% more expensive! Have your wages increased 42.8%? Yeah. I didn’t think so. So, with slightly more in your paycheck this year - say 4.5% - and with one of the things we buy often - gasoline - 42.8% more expensive - your take home pay has been “taxed”. Because, quite simply, your dollars are fewer and buying power decreased.
 
A similar bump is occurring with industrial real estate sales pricing. In 2009 and 2010 - during the Great Recession - here’s what was happening. If you drove down East La Palma Avenue in East Anaheim - one of our industrially zoned corridors in North Orange County - you’d have encountered approximately 22 buildings larger than 50,000 square feet available for sale. Average asking sale prices were $75-$80 per square foot. Thus, you could buy a 65,000 square foot building for just under $4,900,000. Recently, a similarly sized offering closed at over $25,000,000! For those scoring at home, that’s an annual increase of 37.2%!
 
What about rents? Let’s use an example in the Inland Empire East - that area east of I-15 including the cities of Riverside, Perris, Moreno Valley, San Bernardino, Colton, Rialto, Fontana, Beaumont and Banning. Massive amounts of new construction have occurred in this corridor as vacant land abounded and the demand for taller, bigger, well equipped logistics space prevailed. After all, that stuff you buy on Amazon must be stored and distributed from someplace. Only four short years ago, prevailing market rates were in the mid $.40s. Therefore, your thirst for 250,000 square feet was quenched by paying a landlord $112,000 per month. Now? That same 250,000 - if you could find one, BTW - would require $250,000 per month! A 123% increase over four years - 30.8% per year.
 
Ok. So what does this portend for owners and occupants of industrial real estate in Southern California? As predicted in the darkest days of the financial meltdown, the worm will turn! Idiomatically, “you say the worm has turned if someone who has accepted a lot of bad treatment from other people without complaining suddenly decides that they are not going to accept the situation any longer.” Indeed, the worm has. Owners are enjoying an unfathomable increase in their fortunes - as anticipated eleven years ago - but the extent of which no one could have foreseen. Occupants - the beneficiaries of motivated owners and plentiful vacancy - are experiencing a spike in their facility costs. And. Expect much higher rents going forward as exampled above.
 
Akin to a Space X craft, will this astronomical upward trajectory continue? In the short run - two to three years - in my opinion, yes. Why? Back to my economics degree studying supply and demand. With a ravenous appetite for more space (demand) coupled with a limited number of available buildings (supply) and mix in $1.2 trillion of stimulus dollars and you create a classic case of too many dollars chasing too few goods - which results in a higher price tag.
 
But, there’s hope. The worm will eventually turn! She always does.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.