For the first time in years, southern California’s industrial markets are showing signs of softness, as highlighted by CommericalEdge’s latest industrial market report. The record levels of supply — followed by a more recent period in which demand has moderated — has resulted in climbing vacancy rates and slower rent growth.

Specifically, in Inland Empire, Calif., new lease rates have fallen by $3.37 per square foot, while rates in Los Angeles have declined $1.98 per square foot. For now, Orange County is holding fairly steady with a less-significant decrease of $0.46.

Meanwhile, in-place rent growth remained solid: With rates rising by 12.4% in the Inland Empire, 11% in Los Angeles and 8.7% in Orange County during the last 12 months, the cost of new leases has dropped.

This cooling of the markets is further evidenced by remarks from Prologis (the largest industrial real estate investment trust) in its Q2 earnings call. Chief Financial Officer, Tim Arndt, said demand in southern California remained “sluggish and vacancy continues to drift higher.”

At the same time, the ports of Los Angeles and Long Beach recorded some of their busiest months this year. For instance, in July, the Port of Los Angeles handled 940,000 20-foot units (TEUs), marking a 37% year-over-year increase, while the Port of Long Beach processed 882,000 TEUs for a 53% rise from the previous year.

Despite these robust volumes at the ports, vacancy rates in surrounding industrial markets remain elevated. In particular, vacancy rates have risen to 12.4% in the Inland Empire, 11% in Los Angeles, and 8.7% in Orange County — figures that are considerably higher than the national vacancy rate of 6.4% in July, which itself increased by 30 basis points from the previous month.

The report notes that some of this heightened activity at the ports may be due to importers and retailers increasing their inventories to prepare for potential tariffs on Chinese imports and possible labor disruptions. Additionally, during the pandemic, many logistics firms increased their safety stock to mitigate supply chain disruptions, leading to a surge in warehouse demand. For example, companies like Amazon rapidly expanded their storage capabilities. However, as supply chains have begun to stabilize, many of these firms are now left with more space than necessary.

Although the long-term outlook remains solid, the cooldown is expected to persist in the near term: The report also notes that southern California’s normalization could hurt three other market hubs — Phoenix, Las Vegas and Salt Lake City — that have acted as relief valves from sky-high rent growth the past few years.