Inland Empire Industrial Remains Strong, but Sees Signs of Equilibrium

by Jeff Shaw

— By Jerry Holdner, Southern California Region Lead, Innovation & Insight, AVANT, Avison Young —

The industrial market in the Inland Empire has been performing beyond what most of the industry projected over recent quarters. The region boasts a low unemployment rate of 4.2 percent, as of November 2022, which is below the anticipated 5.4 percent estimated a year ago. It is important to highlight, however, that job creation has been uneven. Leisure and hospitality jobs are still underwater, for example. The bright spot is that high-value-added jobs in a broad range of sectors like technology, software development, aerospace, scientific research, medical products and pharmaceutical development continue to grow, which bode well for the industrial sector.

Jerry Holdner, Southern California Region Lead, Innovation & Insight, AVANT, Avison Young

Here are some key market indicators, according to Avison Young’s fourth-quarter Inland Empire Industrial Insights report:

• There was 38.9 million square feet of new industrial construction underway at the end of 2022. This is down 37.1 percent as compared to the end of 2021 when 28.4 million square feet was under construction. 

• There was 13.9 million square feet of positive absorption in 2022, down 53.5 percent when compared to 2021’s record-high total of 29.9 million square feet of positive absorption. This represents 2.5 percent of the total inventory.

• Cap rates have begun to increase in the Inland Empire. At the end of 2022, the cap rates for industrial space were 4.5 percent on average, compared to 2021’s rate of 3.9 percent. This increase has been influenced by the recent interest rate hikes.

• The availability rate for the Inland Empire industrial market came in at 6.8 percent for fourth-quarter 2022. This is almost double the amount of space available at the end of 2021 when the vacancy rate was 3.7 percent.

• Total vacancy in the fourth quarter registered 2.1 percent – 1.8 percent was direct and 0.3 percent was sublet. Sublet space has increased from 810,025 square feet at the end of 2021 to 1,410,798 square feet at the end of 2022.

• Investment sales volume in 2022 decreased by 12.7 percent when compared to 2021. Total sales volume in 2021 was $4.4 billion. Last year came in at $3.8 billion. We also witnessed the price per square foot increase by 55 percent.

• The Inland Empire market had 13 buildings over 1 million square feet under construction — 70 percent of which were pre-leased — at the end of 2022. 

• The Inland Empire East submarket remains the most desirable due to lower lease rates and newer, state-of-the-art developments.

Based on the current environment and what we have learned over a number of economic cycles, we believe 2023 will see leasing demand that’s below the 10-year average, which is 46 million square feet per year. For context, 2022 came in at 31.9 million square feet. Lease rates are starting to show signs of stabilization after setting all-time highs in the first half of 2022. Vacancies are rising slightly from the record-low levels over recent quarters. We are also observing that, for the first time in a long time, development is outpacing absorption. This is not a bad thing, as demand has outpaced supply for so long, resulting in the aggressive rise in pricing. 

It is notable that land is becoming harder to find in the once land-abundant Inland Empire. As a result, we will have increased developer competition for available sites, and subsequent upward pressure on land pricing. 

From a capital markets standpoint, we anticipate industrial sale transactions will remain at similar levels in 2023 as compared to 2022.  

Southern California continues to see the industrial property market thrive. As market share for ecommerce, onshoring and employment trends grow, the strategically located, logistics-friendly Inland Empire will most certainly be a beneficiary for tenants, owners and developers well into the future. 

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