Inland Empire Retail Market Poised for Resiliency in 2021
While the Inland Empire economy was hit hard in 2020, we remain optimistic on the retail sector’s recovery over the coming 12 to 24 months. This market is a benefactor of COVID-19 in that more people than ever before are able to work remotely. This has triggered a migration from urban cores to more spacious and affordable housing in the newer residential communities of Riverside and San Bernardino counties. As the population is anticipated to expand here, retail will directly benefit as residents are more likely to have additional discretionary income to allocate to retail and restaurant venues.
In particular, there are many high-growth submarkets to watch within the region. Some of our top areas include Eastvale, Jurupa Valley and Rialto, which have all experienced expansion despite the restrictions and challenges that COVID has created. They are seeing a significant amount of residential growth as they offer strong school districts, expansive parks, affordable housing, proximity to large employment bases and newer retail amenities. A young family demographic is moving to towns like these, and retail users have taken notice. This has resulted in large retail projects like Renaissance Marketplace in Rialto and the Station in Eastvale taking shape.
Turning to the big picture for leasing, we have seen a negative 1.9 million square feet in net absorption; less than 900,000 square feet in deliveries; a vacancy rate of 8.2 percent; and a 0.1 percent increase in rents over the past 12 months. Big box space has been one of the hardest hit categories (Sears, JC Penney and Stein Mart, among others) with multiple store closings over the past two years. However, there have also been some larger leases signed in the Inland Empire as of late. These include Sportsman Warehouse (Corona), 99 Ranch and Cravings Food Hall (Eastvale), Tractor Supply (Moreno Valley) and Burlington (Murrieta).
Despite limited rental gains and higher vacancies, price appreciation has been healthy with 3 percent growth in 2020 when compared to 2019. Retail asset sales activity in the Inland Empire over the past 12 months is at $1 billion in 543 transactions and a cumulative 4.4 million square feet. The majority of these sales has been assets offered at less than $10 million, which lends to the private investor type accounting for 89 percent of the total transactions.
To that end, smaller, essential, single-tenant net lease opportunities are doing particularly well. SRS recently completed a ground lease sale of a newly developed freestanding retail property occupied by Taco Bell at a 3.93 percent cap rate. This was one of the lowest cap rates ever recorded for a single-tenant net lease QSR (quick-service restaurant) in the Inland Empire, according to CoStar’s records. We also completed the $6 million sale of a new construction, 18,000-square-foot, single-tenant property occupied by Grocery Outlet in the same center. Discount, essential needs retailers are highly sought after by investors as they provide stability even during economic uncertainty.
The Inland Empire market is one of the highest growth regions in the Western U.S., with affordable housing, a focus on the logistics and distribution sectors and a growing local economy. In 2021, we anticipate more leasing velocity to come from the “non-essential” businesses, such as entertainment users, gyms, and nail and hair salons. We also expect more multi-tenant investment sales activity from a diversity of buyer types as low interest rates continue, the debt markets relax and some of the uncertainty caused by COVID-19 is alleviated.
Ultimately, we see significant improvement in the retail sector following larger-scale distribution of the vaccine. Widespread immunity will make people feel more secure as they once again venture into stores and restaurants. Some of the delivery and touchless pick-up conveniences will remain, but many people will be ready to take advantage of what is hopefully a much less restrictive retail environment in 2021.