With the expiration of many tenants’ leases, industrial landlords are now facing the challenge of bringing those leases to market while maintaining a positive relationship with their tenants. The current industrial commercial real estate market has seen a rent surge over the past two years, bolstered by tight market conditions (sub 1% vacancy rates) and aggressive competition for space. Consequent- ly, tenants coming to the end of leases signed three to five years ago are facing a significant increase in their monthly rent, up to 100% in many cases. In the wake of this rapid inflation, many landlords struggle with how best to get through the process.
First, it is crucial to understand that this will be a substantial shock for several tenants. Even if expecting a rent increase, it can be dif- ficult to process exactly how much rates have jumped. If a tenant is unaware of where the market has gone, the rent increase will inevita- bly feel like something you are doing to them, not a shift in the market. Providing compre- hensive market data, either directly or through your broker, can reassure the tenant that this is not a personal affront against them but that costs in the market have increased, just as costs have increased on consumer goods such as gas, eggs, and meat. Deliver a survey of avail- able properties and lease comparables in the tenant’s size range for the last six to 12 months. Sharing market intel will show transparency, help minimize animosity, and neutralize the conversation by illustrating that the increase is based on current market conditions.
Encourage a tenant to go out and tour the market, even if it means expanding their search area. The North LA industrial market has historically had higher rates than the rest of the Los Angeles basin and significantly higher than the Inland Empire. That said, in the last two years, rates in the rest of the market have caught up to North LA and, in many cases, now exceed our rental rates. The bottom line is that moving to industrial markets east or south is no longer a cost alternative.
With conditions that can and do change quickly, landlords must also make an effort to stay up-to-date on the market. Suspicions of an impending recession persist, and tenant tour activity has decreased slightly in recent weeks. However, the vacancy rate in the North LA industrial market is still sub-1% and is expected to remain substantially below historical levels. Even if the national economy does move towards recession, a modest downward adjustment in rental values would still leave indus- trial rates significantly higher than pre-pan- demic levels. Interestingly, some tenants are reevaluating the number of product lines they carry to reduce their square footage needs, thus allowing them to maintain a similar monthly