There’s a clarity that’s emerged in the Inland Empire industrial market following 20 consecutive quarters of positive absorption. As a result, it’s not surprising the market is experiencing the highest number of speculative developments in five years. In 2013, development took off, absorption was strong, and the overall vacancy rate was low, all of which were strong indicators of the role and importance the industrial sector plays in Southern California and the entire Western Region.
The Inland Empire West submarket experienced the majority of the increased gross activity that was reflected in an overall 1.2-million-square-foot, year-over-year increase on 7.9 million square feet of activity in the fourth quarter of 2013. That resulted in 4.2 million square feet of net absorption for the quarter, pushing the year-end total to 14.8 million square feet.
Notably, the Inland Empire East submarket surpassed the West submarket in generating more net absorption during this same time – 2.3 million square feet to 1.9 million square feet, respectively. This was due to the lack of supply of high-quality buildings in the West submarket, while the East submarket was viewed as a more desirable location in terms of building quality.
Steady demand and shrinking supply during the fourth quarter of 2013 resulted in the fourth consecutive quarter of decreased vacancy. At the close of 2013, the Inland Empire vacancy rate had dipped to 4 percent, a drop of 40 basis points from the third quarter of 2013. The year-over-year rate was 200 basis points lower.
The Inland Empire recorded 119 industrial transactions in the fourth quarter of 2013, 95 percent of which involved spaces with less than 500,000 square feet. This signals that demand is not only strong for big box buildings, but for smaller size ranges as well. Companies typically move to or expand in the Inland Empire to achieve lower rents. They also move because there simply isn’t enough available land near the ports to accommodate a new facility in the 500,000- to 1-million-square-foot range.
Despite those positive data points, overall asking lease rates remained static at $0.39 per square foot in the fourth quarter of 2013 when compared to the previous quarter. It should be noted, however, that this is still up 8.3 percent from the fourth quarter of 2012. It is also worth noting that the numbers may be slightly skewed because big box buildings typically don’t disclose asking lease rates.
Demand is expected to grow in this market. This should result in an increase in asking rates when you consider the lag in the Inland Empire’s available supply. This is especially true for buildings in the West submarket, and for buildings with more than 700,000 square feet of space in the East submarket.
Activity in the industrial sector was driven by e-commerce, logistics and consumer products companies that continue to be attracted to the affordability and central location offered by the Inland Empire. Examples include companies such as Amazon and Walmart, both of which were active in 2013. The largest transaction in the fourth quarter of 2013 was Burlington Coat Factory’s 800,444-square-foot deal in the East submarket. Other notable deals included New Breed’s renewal for 404,500 square feet in the West submarket, and Kuehne+Nagel’s absorption of 390,780 square feet of space in Redlands.
It wasn’t altogether surprising to find that speculative development returned to the Inland Empire in 2013 as developers started to underwrite smaller industrial buildings. In fact, 2.6 million square feet of new inventory was delivered in the fourth quarter of 2013, bringing the total completed construction last year to 8 million square feet.
Developers broke ground on 2.8 million square feet of new construction in the fourth quarter, resulting in 14.5 million square feet of space under construction at the end of the year. Even considering the 3.6 million square feet of space that was spoken for (pre-leased or pre-sold), the balance of 10.9 million square feet of spec construction was the highest amount of development we have seen since the fourth quarter of 2007. The most important factor behind these projects was speed to market, as developers attempted to build products that better accommodated the end-users’ needs.
The impact of this increased construction is projected to push up the availability rate in the Inland Empire by about 80 basis points by the end of 2014. CBRE EA forecasts the overall average asking lease rate will continue to increase and grow by 9.6 percent in 2014. The overall outlook for the Inland Empire industrial market remains positive as activity continues to fill the pipeline.
By Joe Cesta, Managing Director, CBRE’s Ontario office. This article originally appeared in the April 2014 issue of Western Real Estate Business magazine.