People are aware of the Inland Empire’s rapidly growing market and the fulfillment center trend that’s sweeping Southern California. Amazon, Walmart and many others continue to be pioneers in logistics and door-to-door fulfillment, but the side of the market people are missing is the smaller, more locally sourced user, the groups that service these large international companies.
Ryan Lal, Lee & Associates
Austin Hill, Lee & Associates
It’s a common theme that when the big guys grow into space there’s normally a contingent of smaller users behind them ready to take down the small- to mid-sized product. This trend has never been more true than it has over the past 12 months. As million-square-foot buildings continue to be leased out by these massive conglomerates, the smaller product has been flying off the shelves. There was a concern in early 2016 that this size range was going to be overbuilt, but due to 8.5 million square feet worth of gross absorption through the first three quarters in the 100,000- to 300,000-square-foot size range, that idea has become a misconception. We’re now sitting with a deficiency of product driving lease rates and sales numbers higher than ever. Lease rates in this size range have jumped about 8 percent over the past year due to increasing demand and lack of supply.
So, what groups are taking down product of this size? The answer to that question is what makes this size segment so strong right now: manufacturing, food users, 3PLs (third-party logistics) and basic distribution have all come back in a big way. They’re leasing and buying space and paying more than historical highs because they have to keep up with the internationals. The requirements these large corporations are forcing the smaller companies to meet are an astronomical feat, so they do everything they can and need to in order to do just that, keep up.
Fortunately for users, there is more supply in this size range on its way. The growing difficulties associated with building product larger than 300,000 square feet is pushing developers to find land more in the seven- to 15-acre size range because they’re not “regionally significant” and can get through entitlements easier and quicker than the larger product. We will see a large uptick in construction in this size range over the next few years, and we have no doubt it will be quickly absorbed.
The Inland Empire has always been a well-rounded market, but seeing the evolution of the market happen simultaneously throughout size ranges is a good indicator for a strong future.
— By Austin Hill, Associate, Lee & Associates; and Ryan Lal, Associate, Lee & Associates. This article first appeared in the December 2016 issue of Western Real Estate Business.