Rising Costs Create a Challenge for Inland Empire Office Landlords

by Jeff Shaw

— By Kyle Yocum, first vice president, and Phillip Woodford, senior vice president, CBRE —

The Inland Empire office market is experiencing a rise in cost, much like all sectors and markets throughout the U.S. As tenant improvement costs continue to increase, it’s becoming more and more challenging to find win-win situations with landlords and tenants. Landlords are having to increase their TI allocations, while tenants are having to show more flexibility as it relates to working with existing space. That, or they must cover a portion of the TI costs themselves or commit to longer-term leases to help the deal pencil for the landlord. 

Due to TI costs, both parties need to meet halfway and make concessions. I think one of the reasons our market has done well is that we are a smaller market. Most parties involved seem to understand the give and take needed to make deals pencil for both sides. 

Concessions are entirely contingent on TI costs, with landlords offering significant amounts of free rent and slight discounts on the rental rate if the TI costs are low. If a tenant is seeking major changes to the space, landlords are staying close to or at their asking rate to make the deals pencil.

Thankfully, the office market has been steady for the past four quarters. Currently, the overall Inland Empire office vacancy rate is 9.5 percent and the overage asking rate is $1.98 per square foot. We’ve seen some larger footprint call centers vacate or put space on the market for sublease, but we’ve also seen some larger blocks of space absorbed through relocations and consolidations of multiple locations. There is also a flight to quality across the Inland Empire’s office market. As tenants evaluate their long-term needs, they are finding they can get by with less space than they needed prior to COVID. Plus, the savings associated with a smaller footprint are allowing them to consider higher cost, higher quality locations. Tenants are focused on attracting employees back to the office, employee retention and safety as they evaluate their long-term real estate needs. 

Rising interest rates and caution related to a potential recession are causing some parties involved in the office market to pump their breaks slightly. Thus far, however, we haven’t seen this have a major impact on the market, and things are still moving in a positive direction. As of third-quarter 2022, we’ve had 100,000 square feet of positive absorption. Pre-COVID, this wouldn’t have been something to write home about, but with most U.S. office markets trending in the opposite direction, seeing vacancy rates continue to drop is very positive. 

Downtown Riverside and San Bernardino seem to be the focus of most of the new leasing and positive absorption. This is primarily due to both locations being the county seats, as both public and private sector office tenants want to be close to various government administrations. Governmental agencies at a county, state and federal level are also leasing space. We’ve also seen schools and medical-related users active in the market.

You may also like