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by Ross Adams, Research & Strategy, Alternatives
After two decades of outperformance, Southern California has been in a two-year slump. How long will it last?
Southern California’s primary industrial markets, including Los Angeles, Orange County, San Diego, and the Inland Empire (Riverside) have weakened significantly during the past two years, much more sharply than the nation, and arguably more than any markets outside of the Pacific Region. While it is not unique for west coast markets to exhibit greater volatility in economic cycles, the stark bifurcation of demand fundamentals between regions is (see exhibit below.)[1] The Pacific Region and Southern California in particular have exhibited high levels of negative absorption in 2024 (following negative trends in 2023), while most other regions posted positive absorption in both years.[1] Despite higher development totals, markets in the Mountain and South Regions have outperformed.
Industrial Property Market Fundamentals Comparison at Year-end 2024
Source: CBRE-EA, as of 2024Q4
Const - Construction
Fundamentals History
Los Angeles led Southern California’s industrial markets in this past cycle, benefiting from its large and diverse economy and population base, and its place as a primary import gateway for US international trade. The combination of severe land supply constraints and persistent demand drove vacancy trends to all-time record lows during a number of years, and market rent levels and investment returns to record highs.[2] In Los Angeles, metro vacancy averaged just 1.2% from 2016 through 2020, then dropped below 1% in the following two years. Riverside and Orange County followed a similar path, as did other markets in the west.[1]
Vacancy Rate Comparison in Southern California Markets
Source: CBRE-EA, as of 2024Q4
As the extreme demand fundamentals reversed course throughout the region, excess space returned to the market in the form of substantial negative absorption in Los Angeles and Orange County and excess construction deliveries in Riverside. Metro vacancy rates (and availability rates that include sublease space) have retraced to levels similar to early-recovery years following the financial crisis (2012).[1]
It is uncertain how long this reversal of trends will last, and there may be different paths to recovery between Southern California markets. But elevated supply competition and weak demand has impacted local market rent levels more than in other regions. Based on CBRE-EA rent data (which measures rent for available spaces), average market rents have declined about 15% from peak levels in Los Angeles and Riverside. However, market rents remain far above pre-pandemic levels (chart below). In Riverside and Los Angeles, estimated market rents in 2024 were twice the market average compared to 2018. This mark-up remains highly attractive to landlords.
Market Rent Growth across Markets Compared to the US Average (CBRE-EA Triple Net Lease (NNN) Asking Rents)
Source: CBRE-EA, as of 2024Q4
The path to recovery
Despite lower-than-average economic growth, Los Angeles is the gateway to a region with a population of 21 million residents and to a state with 39 million residents. The Southern California region has a vast and diverse economy with an annual economic output of $1.7 trillion.[3] On its own, the region would be the world’s 15th largest economy.[4] It is also a primary gateway to the western states, which possess stronger growth characteristics than California. These features and linkages will have durable benefits for local industrial markets.
We believe that demand will turn positive in Southern California in 2025, led by local and regional growth and trade. There is risk of a short-term delay in recovery, as a consequence of disruptions stemming from the Los Angeles wildfires, but our baseline is that economic growth will remain resilient in the near term. There is also potential that the rebuilding of homes, businesses, and infrastructure, in the aftermath of the fires, could stimulate demand for industrial space.
Even with near-term demand improvements, we believe that the coming recovery period will be a protracted one. The chart below estimates recovery periods across markets based on excess available space in 2024 compared to historical demand norms, where future space absorption returns to pre-pandemic levels. Based on this scenario, recovery periods vary from 1.5 years in Riverside to 2.3 years in Los Angeles, assuming minimal new construction for two years.
Estimates of excess supply in Southern California Markets based on pre-pandemic demand norms .
Source: CBRE-EA, as of 2024Q4
SF – Square feet
XS - Excess
In conclusion, the Southern California industrial market will likely have a tough year in 2025 as the foundation for recovery forms, and this will likely weigh on fundamentals and investment performance in the near term. But we continue to believe that the beneficial attributes of the region outweigh near-term risks and the region will again be a good long-term performer.
CBRE-EA, as of December 2024
CBRE-EA and NCREIF, as of December 2024
Moody’s, as of December 2024
SCAG, Southern California Association of Governments, as of December 2024
Past performance is not a guarantee of future results.
Diversification neither assures a profit nor guarantee against loss.
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An investment in real assets involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/ units and their derived income may fall or rise.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments.
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© 2025 DWS Group GmbH & Co. KGaA. All rights reserved.
Past performance is not a guarantee of future results.
Diversification neither assures a profit nor guarantee against loss.
For North America:
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment Management Americas, Inc. and RREEF America L.L.C., which offer advisory services.
This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only. It does not constitute investment advice, a recommendation, an offer, solicitation, the basis for any contract to purchase or sell any security or other instrument, or for DWS or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither DWS nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the DWS, the Issuer or any office, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.
The views expressed in this document constitute DWS Group’s judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer.
Investments are subject to risk, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time.
Real Estate risk: Investing in Real Estate is subject to various risks, including but not limited to the following: Adverse changes in economic conditions including changes in the financial conditions of tenants, buyer and sellers, changes in the availability of debt financing, changes in interest rates, real estate tax rates and other operating expenses; Adverse changes in law and regulation including environmental laws and regulations, zoning laws and other governmental rules and fiscal policies; Environmental claims arising in respect of real estate acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established; changes in the relative popularity of property types and locations; risks and operating problems arising out of the presence of certain construction materials; and currency/exchange rate risks where the investments are denominated in a currency other than the investor’s home currency.
An investment in real assets involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/ units and their derived income may fall or rise.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments.
For Investors in Canada. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the securities described herein and any representation to the contrary is an offence. This document is intended for discussion purposes only and does not create any legally binding obligations on the part of DWS Group. Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on the final documentation relating to the transaction you are considering, and not the document contained herein. DWS Group is not acting as your financial adviser or in any other fiduciary capacity with respect to any transaction presented to you. Any transaction(s) or products(s) mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand such transaction(s) and have made an independent assessment of the appropriateness of the transaction(s) in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with DWS Group, you do so in reliance on your own judgment. The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates, and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. The distribution of this document and availability of these products and services in certain jurisdictions may be restricted by law. You may not distribute this document, in whole or in part, without our express written permission.
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War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led and, in the future, may lead to significant disruptions in US and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investment.
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Carefully consider the fund's investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the fund's prospectus. To obtain a mutual fund summary prospectus, if available, or prospectus, call (800) 728-3337 or download one here. To obtain an ETF prospectus call (844) 851-4255 or download one here. To obtain the RREEF Property Trust prospectus, download one here. Read the prospectus carefully before investing.
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R-070495-4 (7/25)
