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Optimism is returning to the Inland Empire office market. With an overall vacancy rate of 18.3 percent at the end of the third quarter, the office sector is slowly improving. It’s down from a 19.4 percent vacancy rate, which was recorded in the second quarter of 2013. The declining vacancy number shows activity is increasing throughout the Inland Empire as tenants feel now is the time to take advantage of below-market rental rates for Class A and B properties.
Landlords are also competing to lower their vacancy levels. They’re negotiating rental rates, tenant improvements and free rent concessions. Nevertheless, it’s a tenants’ market. There is an absence of new construction throughout the region and, as occupancies continue to improve, renewal negotiations will become tougher for tenants as the market is expected to gradually favor landlords as fundamentals continue their positive momentum.
With that said, tenant urgency is returning to the market as absorption levels increase and options for quality product diminish. In fact, we’re starting to see rent growth in certain sectors of the market. The average overall asking lease rate ended the quarter at $1.73 per square foot, increasing by 1 cent from the previous quarter. CBRE forecasts that rents will rise by years’ end and well into 2014.
Distressed transactions have become scarce with the last distressed sale of Concours Corporate Center on the corner of Concours and Haven in Ontario, which closed in late October. It was a bank REO sale with a property that was more than 90 percent occupied. The property generated multiple offers that drove price and terms, a clear sign that the market is beginning to stabilize and investor confidence is returning.
Overall, the market could recover fairly quickly as a result of ongoing government expansion, spill over from neighboring counties and a continued absence of new construction in the market. Over the past year, the majority of absorption that has taken place is from government agencies. Other key industries contributing to office leasing activity include healthcare, accounting, business services and engineering firms. We’ve been pleased to see new tenants coming from neighboring Orange and Los Angeles counties as those markets tighten and tenants look for better value by relocating or expanding into the Inland Empire. This region allows many companies to take advantage of a large labor pool ready to work for competitive wages as compared to the coastal areas.
The Inland Empire is continuing its incremental climb to an economic recovery as a result of healthy activity in several job sectors. Non-farm employment is forecasted to increase by 1.6 percent by the end of this year and 2.9 percent in 2014, according to the Los Angeles County Economic Development Corporation. These forecasts are predicated on the four main drivers of the Inland Empire economy: logistics, housing, construction and manufacturing.
Recent estimates reveal that office employment in the Inland Empire currently stands at 153,700 workers. Office employment over the past 12 months has increased by 2.7 percent and is projected to grow by 9,000 jobs heading into 2014.
— Joe Cesta, managing director, CBRE in Ontario, Calif.