Southern California’s Industrial Market Outlook: Addressing Challenges and Opportunities

Southern California’s industrial sector is experiencing significant shifts as we approach the end of 2026. According to Marcus & Millichap’s 2026 Midyear Industrial Investment Outlook, all four major markets—Los Angeles, Orange County, Riverside-San Bernardino, and San Diego—are navigating through challenging waters, marked by high vacancy rates and shifting tenant preferences. These conditions are reshaping the competitive landscape, reflecting a broader trend influenced by global port volatility, reduced construction, and evolving investor strategies.

Current State of Southern California’s Industrial Sector

As we transition into the second half of 2026, Southern California is recording the highest industrial vacancy levels in over a decade. Factors such as tariff uncertainty, soft trade flows linked to Asia, and a significant supply influx from previous years are contributing to this complex environment. In this context, major markets like Los Angeles have been particularly affected, with a forecasted vacancy rate of 7.2% by year-end—the worst level since at least 2000. Despite this, investor demand for core industrial hubs remains resilient, as many private buyers continue to target earlier built properties in response to the ongoing market transformation.

Los Angeles: A Unique Case of High Vacancy and Shifting Demand

Los Angeles, ranked 20th in the National Industrial Properties Index, reflects the metropolitan tensions in the region. The county is witnessing rising vacancy rates, especially among properties built in the 2020s, where rates are nearing 25%. This trend is largely attributed to high-credit tenants migrating to modern facilities, leaving older spaces vacated. Interestingly, while overall vacancy rates are on the rise, the sale of pre-2000 buildings continues to dominate the market, highlighting investor interest in these assets despite the complex economic backdrop.

Analyzing the Orange County Market

Orange County, ranked slightly lower at 22nd, displays a more favorable picture in terms of supply and demand dynamics. The region recently recorded a net absorption of 780,000 square feet, ending a streak of net relinquishment for several quarters. However, anticipated year-end vacancy rates will still hit 7%, marking the highest level since 2002. The distribution segment significantly drags down performance due to exits from major tenants and an influx of speculative deliveries. While asking rents are expected to decline modestly, the overall landscape poses opportunities for private investors targeting older assets, particularly in North County submarkets where demand is rebounding.

Riverside-San Bernardino: Transitioning Away from Hyper-Growth

Riverside-San Bernardino, often regarded as the West Coast’s industrial hub, faces its own challenges as it ranks 27th in the index. The Inland Empire has seen a remarkable decrease in construction activity, with anticipated deliveries dropping to 10 million square feet—the lowest since 2012. The recent implementation of California Assembly Bill 98 has tightened development regulations, further constraining supply. Despite these difficulties, a minor vacancy decrease is projected, particularly for smaller warehouse spaces, as private investors remain highly active, particularly in the Coachella Valley and south Riverside County.

The Outlook for San Diego’s Industrial Sector

San Diego, farthest down the ranking at 35th, presents a mixed picture involving heightened vacancy and subdued rental growth. The county is forecasted to reach double-digit vacancy figures for the first time since 2012, despite a notable net absorption of 1.1 million square feet, which was largely driven by a single Amazon facility move. The area is still grappling with limited new supply as construction remains below historical averages. However, the sales market is showing signs of improvement, with increased activity drawing both institutional and private capital to long-standing industrial zones, signaling potential resilience amidst the overarching challenges.

Strategic Implications for Investors and Future Developments

As the Southern California industrial segment navigates high vacancy combined with disciplined construction, investors are strategically positioning themselves in response. The enduring demand driven by port activities and a dynamic private investment landscape is vital for long-term viability amidst uncertain future market conditions, including potential tariff impacts and geopolitical disputes affecting fuel costs. Investors are advised to focus on smaller infill warehouses and manufacturing-adjacent properties, while also monitoring emerging opportunities that arise from the prevailing gaps between current vacancy levels and potential future recovery. Ultimately, positioning oneself in the right asset types is essential for harnessing the evolving dynamics in this complex yet promising market landscape.