Soaring Demand for Inland Empire Warehouse Space Brings Opportunities for Developers
By Richard Lee and J.C. Casillas, NAI Capital Commercial
In the fourth quarter of 2020, the Inland Empire industrial market continued to battle the effects of an economy that has so far spent three-fourths of the year under a COVID-19 shutdown. After dipping for several quarters, the average asking rent held steady at $0.72 triple net, down 6.5 percent from the fourth quarter of 2019. The vacancy rate nudged up 10 basis points from the previous quarter’s record low, down 90 basis points from the fourth quarter of 2019 to 3.9 percent.
Pointing to the market’s resilience this time around, vacancy remains 8.4 percentage points lower than the prior peak, which hit in the third quarter of 2009 during the Great Recession. There has been exponential growth in demand for ecommerce due to COVID-19 and related industries, such as packaging and third party logistics. This has resulted in a fast recovery for the Inland Empire industrial market.
Soaring demand for warehouse and distribution space has created opportunities for developers. The vacancy rate has increased, due to the 1.9 million square feet of completed construction added to the market in the fourth quarter of 2020. Since the first quarter of this year, more than 15.6 million square feet of industrial space has been completed. However, the demand has outpaced new warehouse completions by more than 4 million square feet, while year-to-date net absorption totaled about 19.7 million square feet. Warehouse and distribution square footage under construction has surged 20.4 percent from the third quarter of 2020, and 5.4 percent from the fourth quarter of 2019 — topping 22.3 million square feet under construction at year end.
While the COVID-19 shutdown noticeably disrupted businesses, developers resumed construction as demand persisted. For example, NAI represented Bridge Development in its purchase of a 12-acre site at 981S Wanamaker Ave. and 4600 E. Wall Street in Ontario in December 2018. The site was developed into a two-building, 268,753-square-foot distribution project called Bridge Point Ontario. While under construction, the project was forwarded to Morgan Stanley Real Estate’s Prime Property Fund. In October 2020, prior to construction being completed, we secured a long-term lease with NeilMed Pharmaceuticals for the 90,342-square-foot building (Bridge Point Ontario II). By December 2020, the 178,523-square-foot Bridge Point Ontario I was leased by Western Post (US), Inc. The freight-forwarding ecommerce company signed a long-term lease that would allow it to expand its operations in Southern California.
Demand for well-located, state-of-the-art warehouse distribution space with high ceilings and very good truck turning radius for efficient goods movement continues to keep vacancy tight. Inland Empire’s West industrial submarket is the fastest-growing and most dynamic in Southern California. In the West, industrial space under construction was up 6.9 percent from the fourth quarter of 2019, while year-to-date leasing volume exceeded 25.5 million square feet. Both of these figures were the highest in the region.
Today’s sought-after warehouse distribution spaces feature corporate images with ample office space, an open warehouse area with minimum 32’ clear height ceilings, good column spacing and plenty of dock-high loading positions. Location and access to transportation are also very important. In the case of Bridge Point Ontario, tenants have immediate access to the 15, 10 and 60 freeways. The asset is situated just two miles from Ontario International Airport, as well as the FedEx and UPS hubs.
These recent leases underscore the brisk absorption of speculative development when the project is well-located and contains state-of-the-art warehouse distribution space. This indicates that vacancy and pricing should remain minimally unchanged heading into 2021. Sales volume also rebounded in the fourth quarter, rising 25.4 percent from third-quarter 2020 to more than $489 million. The average cap rate moved down 140 basis points from the third quarter of 2020, to 5.1 percent.
The outlook for the Inland Empire’s industrial market remains positive, pointing to a swift recovery. Favorable demographics will help the region absorb the supply of completed warehouses. Following record job losses in April, the Inland Empire’s trade, transportation and utilities sector regained a remarkable 34,100 jobs by November. Not surprisingly, the region’s desirability as a distribution hub along the path of the Los Angeles and Long Beach ports will always help fuel demand for warehouse and distribution space.