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 in the mid-6 percent range.
The Inland Empire area’s employment growth will expand in 2014 as compared to the previous year. In 2013, 13,500 new positions were created. This year, job growth will accelerate to 27,500 jobs, a gain of 2.3 percent. As more jobs are created across the Inland Empire, investors will continue to find the area more attractive. In addition, about 700,000 square feet of space will come online in 2014, up from 380,000 square feet in 2013.
Consumer spending also improved nationwide as of the end of February, lifting retail sales for the first time in three months. Winter kept shoppers at home over the past few months, particularly in the Northeast and Southeast. Some of the pent-up demand for retail goods was released in February, though revisions to the previous two months cut deeper than anticipated. As the weather improves and the job market maintains a steady growth trajectory, retail sales should gain solid footing. March, however, could prove to be another challenging month for year-over-year comparisons as Easter retail sales will shift to April this year. Nonetheless, most indicators point toward economic improvement as 2014 progresses. This will boost spending, although at a more modest pace than during the first stages of the recovery.
In the Inland Empire, retail sales moved up 0.3 percent in February, an encouraging sign after declines in December 2013 and January 2014. Most of the gains recorded in February were payback from cuts in January, with broad-based gains in eight of the 11 components. The largest advances in retail favored sporting goods and hobby stores, which rose 2.5 percent, as well as online retailers, which rose 1.2 percent. The only losses recorded in February 2013 were food and beverage, general merchandise, and electronics and appliance stores. Even these segments recorded only slight declines. It is only the general merchandisers in the midst of a continuing trend toward tightening.
The Inland Empire’s marketwide vacancy rate will move from 80 basis points to 8 percent, which is double the improvement seen in 2013. Operators will gain enough leverage to lift asking rents for marketed space by 2.5 percent, to $15.92 per square foot, in 2014. Last year’s asking rents went down by 2 percent. Opportunistic investors seeking assets with minimal to no construction needs may opt for smaller centers in the eastern stretches of the county where growing demand will fill vacant space and support an increase in rents.
By Kevin Boeve, Regional Manager of Marcus & Millichap in Ontario, Calif. This article originally appeared in the April 2014 issue of Western Real Estate Business magazine.