A healthy retail market in California’s Inland Empire is expected in 2014. The region will gain measureable momentum as the return of homeowners is reviving tax revenue and retail sales in once-inactive neighborhoods. Retail builders are responding by restarting previously delayed projects in the area, including a few developments that have been involved in litigation for years. The Village at Mission Lakes was completed in 2013 after six years of stagnancy. After enduring several delays, Kendall Plaza in San Bernardino will come online in 2014. The value-add sector of the Inland Empire’s multi-tenant investment arena will move forward this year as buyers pursue opportunities ahead of a stronger improvement in operations. Local players and investors discouraged with a shortage of listings in Orange and Los Angeles counties will move farther east to find properties with potential upside. The influx of capital moving into the market will result in a greater number of repositioning plays, particularly in areas west of Interstate 15, where minimal construction has come online in recent years. Investors who acquire properties on highly trafficked corners should be able to leverage the tenant mix and collect higher rents. Once completed, these properties can be divested at cap rates …
Market Reports
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 …
If you had to summarize Orange County’s multifamily market in one word, it would be “robust.” Generally speaking, the apartment sector has thrived across the nation in recent years, but few markets have performed better than this booming, affluent slice of Southern California. Soaring occupancy rates, rent growth, compressing cap rates, strong investor demand — these are the characteristics of today’s Orange County multifamily market. Thankfully, they should be the trends of the future as well. Underpinning the multifamily sector’s health is the recovering Orange County economy. Over the past year, payrolls have increased by 2.3 percent, according to research by Jones Lang LaSalle (JLL). Although all the major employment sectors have experienced expansion, the largest gains have occurred in construction, financial activities and leisure/hospitality. These were the three industries hit hardest during the Great Recession. Overall, half of the jobs lost during the recession have been regained. The county’s unemployment rate in October was 5.8 percent, significantly lower than both the California and national rates, which were 8.7 percent and 7.3 percent, respectively. Looking ahead, the economic indicators are positive: both job and population growth should average 2 percent annually until 2017. A growing Millennial population and expensive for-sale …
New paradigms in tenant demand and workplace trends have dramatically altered Los Angeles’ office market in the past three years. Internet, creative and entertainment (ICE) tenants have primarily pushed demand and new trends in adaptive reuse, while finance, insurance and real estate (FIRE) end users — along with their law firm counterparts — have contracted. This is often due to lower spatial requirements per employee, coupled with the rising trend of collaborative space. The segments of LA with repurposed and renovated office properties are white hot. This is especially true in Santa Monica’s Silicon Beach area where rents average $50 but can get as high as $70 per square foot. This new coastal, high-rent district benefits its surrounding areas, as well as the city’s CBD and Downtown, where tenants are seeking lower-cost space. Despite an overall market vacancy of about 18 percent, Downtown rents are holding steady due to a concentration of Class-A owners holding firm or even slightly escalating rates. Considering the real estate fundamentals — relatively high vacancy and 9.5 percent unemployment — there may be a disconnect in the investment market. Los Angeles office investment is generally still a bargain compared to other global gateway markets, however. …
While economic uncertainty still abounds, the Los Angeles County retail market remains on the road to recovery. Several significant leases were signed during 2013, representing an expansion of both value retailers and luxury brands. Also contributing to positive market momentum was the lack of massive closures by big box retailers, such as Borders and Blockbuster, which were seen in previous years. Los Angeles also maintained its status as a primary market for investors. Cap rates trended in the low- to mid-5 percent range for core grocery/drugstore-anchored product and around the 6 percent range for power/promotional shopping centers. Investor demand was strong for high-profile and street-front retail in Hollywood and Beverly Hills, resulting in aggressive acquisition terms and cap rates falling into the four percent range and below. Los Angeles’ retail market overall experienced moderate leasing activity in 2013. CoStar reported a positive net absorption of 850,112 square feet in the third quarter. However, one submarket that saw significant activity—retail and otherwise—was Downtown LA with the FIGat7th open-air shopping center leading the renaissance. In addition to CityTarget, which opened here in 2012, FIGat7th recently signed a 27,000-square-foot lease with Spanish clothier Zara for a flagship location and a 32,000-square-foot lease with …
In its entirety, the Orange County industrial market showed positive net absorption at the closing of 2013. Neighboring markets like Los Angeles and the Inland Empire, however, displayed a more robust recovery when compared to the Orange County industrial market. This reflects a less aggressive, but steady decrease in vacancy at about 4.3 percent — a number that has not been seen since the third quarter of 2008. Most of the market’s leasing activity has been established by users in the less than 100,000 square feet range. A few notable large transactions that took place in 2013: • Cargill, Inc. moving into 184,438 square feet at Fullerton Crossroads • Obey Clothing moving into 170,466 square feet on Michelson Drive in Irvine • Cavotec Dabico US Inc. moving into 159,943 square feet at 5665 Corporate Ave. in Cypress Pointe Rental rates steadily increased in 2013. The average quoted asking rate for available industrial space was $8.49 per square foot, per year at the end of the third quarter of 2013. This represented a 1.3 percent increase in quoted rental rates from the end of the second quarter, as rents were reported at $8.38 per square foot. Although lease rates underwent one …
Strong recent job growth in Orange County has led to a major pickup in demand for quality retail space. The county’s low development profile has resulted in correspondingly high long-term occupancy levels. Thus, the recent recession with its negative absorption drove the local community neighborhood shopping center rate no higher than the 7 percent peak it reached in the first quarter of 2010. Descent has been the trend ever since. The rate has dropped to 5.5 percent by the end of the second quarter, down 40 basis points year-over-year amid modest additions to supply. The second quarter National Community neighborhood sector rates, by comparison, were notably higher at 10.5 percent. Orange County power centers’ vacancy rates are also lower than the national rate. There have been no power center projects completed in the county since 2007. The vacancy rate for power centers in Orange County is 3.9 percent, compared to 5.7 percent nationally. Orange County’s typically strong economy, positive population growth and high levels of affluence bode well for local retailing and the local retail real estate market. All of Orange County’s cores will see new retail development delivered in 2014 and beyond. Some of the new development will be …
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 …
The Inland Empire’s commercial real estate market is seeing large big box industrial buildings of 300,000 square feet or more being built on a speculative basis — and they are being absorbed by a healthy market. There is nearly 10.4 million square feet of industrial space currently under construction in this region. Once completed, this new space will increase the total inventory of industrial properties by 2 percent, or from 509 million square feet to 520 million square feet. At the same time, unemployment is above 7 percent for the nation and almost 9 percent in California, with many questioning the strength of the economy. If it seems like a big gamble for developers of these big projects to be building in such uncertain times, think again. This money will likely fare better than it would in the bank. These large projects are being leased and sold. Since 1982 — when only 3.5 million square feet was constructed for the year — the Inland Empire has seen average construction levels of about 13 million square feet annually. Some years it seemed like construction could not keep up with demand. This was the case in 1989, when 34.3 million square feet …
International trade is a driving force behind one of the most vibrant industrial markets in the nation. There are more than 1.7 billion square feet of industrial space in Los Angeles County, Orange County and the Inland Empire, with 18.2 million square feet of additional space under construction at the end of the third quarter. The South Bay and Central Los Angeles markets are leading the way in new development in Los Angeles County. The LA Basin’s occupancy gains of 12.7 million square feet during the first nine months of the year dropped its overall vacancy rate to 4.9 percent, from 5 percent last quarter and 5.3 percent a year ago. As the logistics hub of Southern California and the big-box capital of the U.S., international trade is especially critical to the Inland Empire’s industrial market. As a result of increased demand for modern warehouse facilities, warehouse construction in the Inland Empire more than doubled from a year ago to 16.4 million square feet. It was the most active in the nation. Increased demand for industrial space in the Inland Empire lowered the overall vacancy rate to 6.2 percent in the third quarter. This was 60 basis points lower than …