Rexford Industrial: Focus On California Now Comes Back To Bite

Rexford Industrial (REX), a real estate investment trust (REIT) specializing in infill industrial properties across Southern California, has long bet on the region’s dominance as a global logistics hub. Its strategy of acquiring and repositioning underperforming warehouses in high-demand submarkets has fueled robust financial performance, as evidenced by its Q1 2025 results. Yet beneath the surface of strong rental growth and disciplined capital allocation lies a growing risk: an overconcentration in a market showing signs of strain.

A Strong Foundation, But Cracks in the Foundation

Rexford’s Q1 2025 earnings highlight its operational prowess. Core FFO per share rose 6.9% year-over-year to $0.62, while consolidated net operating income (NOI) surged 18.4% to $193.6 million. Leasing activity was equally impressive, with renewal rents soaring 29.4% on a net effective basis, reflecting the scarcity of high-quality industrial space. Repositioning projects—such as upgrades to warehouses in prime submarkets—delivered a 7.6% unlevered yield on investments, underscoring management’s ability to extract value from underutilized assets.

Yet the cracks are in occupancy trends. While the portfolio’s average occupancy held steady at 95.9%, certain submarkets are weakening. Ventura County’s occupancy plummeted by 480 basis points to 91.4%, while San Diego and Los Angeles also saw declines. These drops signal a cooling in demand, likely exacerbated by macroeconomic uncertainty and oversupply in secondary markets.

The California Concentration Conundrum

Rexford’s strategy hinges on Southern California’s status as the “fourth largest industrial market globally,” but this geographic focus is a double-edged sword. The region’s tight supply of infill land and high barriers to new construction have historically supported rents. However, as tenant demand softens in specific submarkets, the lack of diversification leaves Rexford vulnerable to localized downturns.

The leasing data tells the story: new leases in Q1 saw a 3.2% net effective rent decrease, contrasting sharply with the 29.4% increases on renewals. This suggests that while existing tenants are locked into high rates, new tenants are negotiating harder—a sign of weakening pricing power. If occupancy continues to slip in weaker submarkets, same-property NOI growth could stall, especially since the company projects only 0.75–1.25% annual growth on a net effective basis for 2025.

A Solid Balance Sheet, But Can It Cushion a Fall?

Rexford’s financial discipline offers a buffer. Its leverage ratios—22.8% net debt to enterprise value and 3.9x net debt to EBITDA—rank among the lowest in the REIT sector. A $504.6 million cash hoard and $995 million credit facility provide ample liquidity. Management also prudently avoided share buybacks in Q1, preserving capital for opportunistic acquisitions or dispositions.

Yet the company’s reliance on capital recycling—selling maturing assets to reinvest in higher-return projects—is now facing a test. While Q1 sales of two properties generated 10.5–13.3% unlevered IRRs, only $30 million in dispositions are pending. If buyers grow cautious in a slowing market, Rexford may struggle to offload assets at desired prices, squeezing returns.

The Bigger Picture: California’s Industrial Market Outlook

The Southern California industrial market remains resilient but is not immune to broader economic headwinds. Rising interest rates, supply chain shifts toward regional hubs, and a slowdown in e-commerce growth could further pressure demand. While Rexford’s focus on “irreplaceable” infill assets—a term management uses repeatedly—provides a moat, it also means the company cannot easily pivot to cheaper or more dynamic markets.

Investors are already pricing in these risks. Rexford’s stock, down about 12% year-to-date as of early 2025, underperforms the broader Industrial REIT Index by 5 percentage points, suggesting skepticism about its California-heavy exposure.

Conclusion: A High-Reward, High-Risk Play

Rexford Industrial remains a well-run company with a track record of value creation. Its disciplined capital allocation, low leverage, and premium pricing on asset sales ($410–$497/SF) underscore the appeal of Southern California’s industrial assets. However, the geographic concentration magnifies execution risks.

If occupancy declines persist, especially in Ventura and Los Angeles, same-property NOI growth could fall short of the 0.75–1.25% guidance. Conversely, if the region’s structural advantages—proximity to ports, tech hubs, and consumer markets—keep demand buoyant, Rexford could thrive.

Investors must weigh two truths: Rexford’s focus has delivered outsized returns, but it also makes the company a leveraged bet on Southern California’s industrial market. For now, the strategy works, but the “bite” of overconcentration looms larger than ever.

Data as of Q1 2025 earnings report and market commentary.