Broker Touts Creative Deal Structures
Top industrial broker James Hwang says winning deals in the current market requires moving beyond standard terms. He recommends using creative TI allowances and phased rent escalations to overcome tenant hesitancy. Hwang also stressed the importance of knowing competitors' vacancy pipelines to anticipate moves before they appear on listing services.
The push for creative dealmaking comes as Southern California’s industrial market recalibrates. In the Inland Empire, the direct vacancy rate climbed to 7.2% in the fourth quarter of 2025, while average asking rents stabilized at $1.00 PSF, a 10.7% decrease year-over-year. Similarly, Los Angeles County's vacancy rate hit a record 6.2% at year-end 2025, with average asking rents down 3.4% from the prior year. Landlords are using incentives to attract tenants in a market where sublease space accounts for roughly 20% of available inventory. Tenant Improvement Allowances are a key tool, providing funds for tenants to customize a space for their specific operational needs. These allowances typically cover hard construction costs like walls, lighting, and HVAC modifications, but often exclude furniture, IT cabling, and moving expenses. Phased, or "stepped," rent increases offer tenants predictability with pre-set annual escalations, such as a fixed dollar amount per-square-foot. This structured approach provides an alternative to increases tied to the Consumer Price Index (CPI), which can create uncertainty for tenants during periods of inflation. Demand remains concentrated among third-party logistics (3PL) providers and e-commerce companies seeking modern, high-clearance facilities near ports and rail lines. While overall leasing activity has slowed, significant deals are still being signed, including Maersk's 1 million-square-foot lease in Hesperia and iDC Logistics' 844,000-square-foot deal in San Bernardino. The construction pipeline is tightening, which could shift negotiating leverage. New construction starts in the Inland Empire have fallen by over 50%, pointing to a potential "Supply Gap" by late 2026. Los Angeles County's construction activity is also limited, with just 3.8 million square feet under development at the end of 2025, suggesting the current tenant-favorable conditions may not last. Market leader Prologis posted a record year for leasing in 2025, signing 228 million square feet of deals nationally, with Southern California being a key driver. The firm's CEO, Dan Letter, stated that vacancy appears to have peaked and rents are starting to inflect across many markets. This sentiment is backed by action, as Prologis raised its 2025 development forecast, driven largely by pre-leased, build-to-suit projects.
