John R. Daciolas, Newmark Grubb Knight Frank
Things have been steadily moving forward in the Inland Empire office market. Consistently the fastest-growing, non-farm job market in Southern California, the region’s exceptional growth in professional and business service positions provides a compelling reason for investors to view this office market as opportunistic.
There is a high demand for Class A and B property investments. We are also seeing overseas buyers, mostly from China, showing interest in the region. Unlike Los Angeles and Orange County, which have been popular with foreign investment for the past several years, this is a new trend for the Inland Empire. It also suggests global investors are looking to the region as an attractive alternative to some of the pricier Southern California markets. The Inland Empire is now on the map.
The good news is there is still room to add value by leasing up vacant space and realizing future rent growth. We have recently seen many investors buying risk-oriented projects, anxious to secure some of these affordable assets before rates and pricing rise.
Some of the strongest submarkets for leasing and investment are the CBDs of Corona, Riverside, Rancho Cucamonga and Temecula, as well as the Ontario Airport area. There is a high demand for quality buildings in these regions. With an overall vacancy rate of 15 percent, office properties in the CBDs are faring better, with Riverside’s CBD at a vacancy rate of 7 percent or less, for example.
Rents have been steadily increasing in the Inland Empire, though they’re still slightly below their peak in 2008. I anticipate we will surpass that pre-recession peak in the next few years. With third quarter Class A asking rents averaging $2 per square foot, we are currently seeing landlords raising rents anywhere from five to 10 cents per square foot. It has also become increasingly harder to find large blocks of space in key locations as the job market grows and no new development comes online anytime soon.
For example, our team recently represented Hub International Insurance, which had outgrown its space in Riverside. NGKF ended up proposing that the company separate into two nearby properties, as there was not a large enough block of space to accommodate its requirement. The insurance brokerage relocated its headquarters to 25,000 square feet within a prime Class A office tower in Downtown Riverside. NGKF ultimately worked with a retail owner who converted the third story of its retail property into office space to fulfill the company’s back office space requirement, which consisted of another 25,000 square feet. We secured ample parking, a new entrance and had an elevator installed. Although this was a success story, this further proves that large blocks of space are few and far between.
We may not be quite there yet, but the Inland Empire office market is getting stronger, and we can expect to see continued demand through 2017.
By John R. Daciolas, Senior Managing Director, Newmark Grubb Knight Frank. This article originally appeared in the December 2015 issue of Western Real Estate Business magazine.