There is no denying that the industrial market in the Inland Empire is improving. In the past three quarters, a great deal of space has been leased, and vacancy is therefore down. Voit’s first quarter industrial market report revealed that vacancy rates have declined to 8.95 percent in the market, down from 11.55 percent year-over-year, in large part because ten buildings over 500,000 square feet have been leased in the last three quarters. There is actually now a shortage of buildings in this size range.
Big Buildings Make a Comeback
As occupancy increases, lease rates are rising. This excites developers and investors alike. On the development side, the market is seeing speculative development for the first time in three years in certain size ranges — a huge indication of an improving marketplace.
At least four industrial buildings are either under construction or in pre-development in the Inland Empire right now. Watson Land Company recently broke ground on a 600,000 square-foot building in Redlands, while the O’Donnell Group has broken ground on a 786,000-square-foot building in Banning. In addition, at least two others in the 600,000 to 700,000-square-foot range are now ready to break ground.
While excitement grows around new projects, there is still a risk that these new developments will face. If all of these current projects and several more planned projects move forward, it could lead to an oversupply of large product if demand slows.
The Flip Side
In opposition to the big building space, there is still a large amount of available product under 300,000 square feet. In this area of the market, lease rates have stabilized but they haven’t increased.
In order to revitalize these smaller and mid-sized buildings in the market, the economy still has some recovering to do. The Inland Empire market relies on three key elements: jobs, housing and the Ports of Long Beach and Los Angeles. The good news is that port activity is increasing, but jobs and housing are still negative. The overall recovery of the Inland Empire market will be slow until we see a recovery in both jobs and housing.
Money, Money Everywhere, and Not a Space to Buy
On the investment side, institutional capital is being deployed fast and furiously in the Inland Empire marketplace. Consequently, cap rates are now as low as five percent, down from a high of seven and a half percent in the bottom of the recession. With this, large institutional capital is now poised to enter the market.
But there is a caveat on the investment side of things — there are very few properties available for sale for these investors. Most of the Inland Empire’s industrial product was either sold as the market emerged from the recession, or owners are long term investors that held onto their assets and they are still not willing to sell.
Our Prognosis
Cautious optimism on behalf of owners and buyers of real estate should remain throughout the year as long as demand for space continues. If so, rents should actually rise relatively dramatically off their bottom, which might not be good for most tenants. Our advice to tenants: make deals now!
— Walt Chenoweth is executive vice president with Voit Real Estate Services.