Forget Tempered Optimism – Industrial’s Outlook is Positive

The industrial development pipeline in Northern California shows a notable uptick in the next 12 months, highlighting continued strength in the sector there, particularly for last-mile delivery and AI-driven facilities. Southern California’s development pipeline is also healthy, with 54% of respondents expecting more than one new project in the next year. E-commerce is the second largest development driver at 28%, down from 50% in the previous survey. While e-commerce has been the largest development driver of industrial space across previous surveys, it’s now in second place for new development behind data centers and digital infrastructure. Allen Matkins' Partner Spencer B. Kallick, sat down with Allen Matkins Partner Jonathan Shardlow and Scott Sowanick, managing director and partner, Stream Realty Partners to talk about these and other themes impacting the industrial sector in the Winter 2025 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

Spencer B. Kallick: Jonathan, let’s start with what key trends you’re seeing in industrial.

Jonathan Shardlow: The trends we're seeing relate to reassessment of location and the types of users that are out there in the industrial marketplace. With reassessment of location, we're seeing users look further and further away from the ports. Even though it's more advantageous to be closer to the ports because there's not a lot of product in the infill markets, it's easier to develop further east and further north into the high desert and into the low desert. We're even seeing development being pushed out of state into the Phoenix markets and the Vegas markets, which are actually booming compared to the Southern California markets. With respect to users, we're seeing a lot of cold storage users that supply restaurants and grocery stores looking for cold storage warehouses.

SBK: Scott, where do you see areas of opportunity?

Scott Sowanick: The Southern California market has been in a tough spot for 18 to 24 months, but you're starting to see green shoots related to tenant activity and economic stabilization.

SBK: About a third of survey respondents said they would be redeveloping or repurposing existing office space into industrial space. Can you explain how these projects pencil out?

JS: We've been working on various projects throughout California, but there are a lot of headwinds with those types of projects. Usually, cities do not want to lose their office land use. They used to be key contributors to the economy and they're hoping things change back, so it's very difficult to get a rezone from office to industrial use.

SS: I love this topic. The devil is in the details, but I think it is a secular theme that will not go away. It's something that we have successfully executed at Stream, and we will continue to analyze it on a deal-by-deal basis. There are two schools of thought. Can you keep the existing structure and retrofit it? That can be challenging, but it doesn't mean it can't be done. On the other side is obviously buying an office building, razing it, and redeveloping brand new industrial. So again, you need to be thoughtful about where it's going to work and what pencils.

SBK: The Forecast points to high demand for e-commerce and data center industrial space in California. Jonathan, what are some of the market dynamics driving this trend?

JS: We've seen a significant uptick in e-commerce and data center demand throughout California. The Amazons, Walmarts, and Costcos are still looking at direct e-commerce as opposed to retail establishments so that is a trend that we continue to see growing. And then obviously with data centers and AI, we're seeing a significant amount of data storage needed. Those are two areas of demand with significant growth.

SS: E-commerce has been around for a long time, but as a total percent of retail sales, it still remains relatively small compared to where it's going to go. As a secular growth story for the industry, we see modernization of supply chains and the need for e-commerce continuing to increase.

SBK: Scott, you see a site that's zoned industrial, does your team get it? Does the data center team get it? Are you chasing the same sites?

SS: That’s a really good question. It’s a separate business, so we're not chasing the same sites. The power needed for a data center is huge. With respect to our industrial development business, our goal is to deliver buildings with ample building power capacity so that you don't lose that future tenant who may or may not need the power. It is a totally different world related to data centers. Power is the new water.

SBK: Jonathan, are you seeing any impacts of California's new law, AB 98, on industrial development?

JS: We are seeing significant impacts on industrial projects ever since its inception, which was January 1st, 2025. The way it came out of the legislature, it did not go through the normal process, and therefore the language contained in the bill is very difficult to decipher. There are multiple interpretations of the law, and it's really problematic. So one of the things that the industry is working on, along with League of California Cities and some of the other municipal entities, is trying to get the governor to do a cleanup bill for AB 98, which would provide better language throughout the bill.

SBK: Some communities don't want industrial next to their neighborhoods. Scott, what other challenges are you seeing? How are you navigating those and where do you see that moving?

SS: Unfortunately, I don't see it moving anywhere in terms of overall sentiment improvement. We can all hope there may be some political relief, but it's unlikely. How we think about it, though, is that there are great municipalities in Southern California that are supportive. You just need to take the time to figure that out and build those relationships.

What I think is incredibly interesting about AB 98 is we've tossed around the term "irreplaceable real estate" for a long time, and now AB 98 legally made that the case, right? The headline about AB 98 is obviously not a net positive. It introduces new design rules that need to be followed and will have cost implications. But if you take the time to understand the law, and it goes into your calculus related to site selection, I think there could be some opportunities from an investment standpoint.

SBK: Jonathan, the survey shows that development remains strong. What factors are causing new development to grow?

JS: Industrial demand in California continues to be very strong. There's a lot of data out there that it's getting weaker, but we're really just returning to normal vacancy rates. After the Pandemic, which had 2% vacancy rates, now we're seeing 5 to 6%, which is actually the historical average. With the population in California and getting goods into the West, the ports of Los Angeles, Long Beach, San Francisco, and Oakland continue to be very busy. So we continue to believe there will be high demand for industrial development in California.

SBK: What's driving the insatiable appetite for industrial in Southern California? Is it just e-commerce? Is it data centers? Or is there something that makes Southern California unique?

SS: The need per capita for modern industrial to service the 18 to 20 million humans who live here in Southern California is a huge factor. Obviously, you have the ports of LA and Long Beach, which are performing statistically well. That's a net positive. Also, infill industrial areas of LA County, San Fernando Valley, and Orange County are markets full of smaller older buildings. If you need to grow as a tenant in an infill location, you will likely grow into multiple buildings, which is not the most efficient scenario for a company. If you can find (or create) the land in the right location, you have the ability to deliver more efficiency to future growing users.

SBK: In January of 2026, what are we going to be talking about?

SS: Hopefully what we will be talking about specific to Southern California industrial is that the correction we've been living through since the summer of 2022 has found its footing, and market fundamentals have improved across the region. What I also hope we're talking about is that the green shoots that we are seeing today are related to tenant activity, deals, and capital markets activity, but ultimately, overall tenant activity in the market has vastly improved.