Los Angeles, Orange County Look to Inland Empire for Industrial Needs

John D. Boyer, NAI Capital

The Inland Empire industrial market signaled that it may be transitioning toward slower growth in the second half of the year. Leasing volume declined sharply to nearly 7.8 million square feet, which is the lowest volume seen in a single quarter since 2011. New construction deliveries pushed the average rent to the highest level on record — $0.86 per square foot. Of the 13.7 million square feet completed year to date, 32 percent remained available at the end of the quarter. Despite the deliveries, vacancy remained steady at 4.5 percent since the third quarter of 2018, proving demand for industrial space in the Inland Empire is still present.

The U.S. economy may be facing a drop off after climbing steadily for the past 10 years. The trade war and tariffs are undoubtedly influencing the ports’ cargo volume, which supports industrial demand in the Inland Empire. Retailers usually prepare for increased sales during the holiday season by increasing imports in July and August. However, imports through August 2019 were down 2.4 percent from 2018. Imports had increased 3.1 percent last year at this time. The U.S. is dependent on imported goods, though, so cargo volume is unlikely to take a significant dive.

The Inland Empire has been the answer to Los Angeles and Orange counties’ shortage of industrial space. The construction boom continued as the pipeline totaled nearly 28.5 million square feet — one of the highest construction volumes on record. Within parts of the Inland Empire, however, space is becoming more difficult to come by. The West submarket closest to Los Angeles and Orange counties is largely built-out. Developers are turning to the East submarket — which accounted for nearly 62 percent of construction — for growth. Additionally, tariffs on Chinese imported steel and aluminum, not to mention increasing labor costs, are inflating both timeline and budget. As a result, developers must charge higher rent for new space. Large-scale buildings of 100,000 square feet and above have asking rents of $0.78 per square foot this quarter, up 52.9 percent from a year ago. The difference between rent in the Inland Empire and Los Angeles County is now 16 percent — last year it was 29.7 percent — suggesting the Inland Empire is not the inexpensive alternative it once was.

— By John D. Boyer, executive managing director, NAI Capital. This article first appeared in the December 2019 issue of Western Real Estate Business magazine. 

Content Partners
‣ Arbor Realty Trust
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
‣ Northmarq
‣ Walker & Dunlop

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