By Tony Phu, Senior Executive Vice President, Colliers
Rental rates and land values continue to outpace construction cost inflation, driven by the insatiable need for industrial and distribution space across the entire Western U.S. This is especially true in Southern California where a critical mass of population/tenant demand and high barriers to entry for development have created an exacerbated supply and demand imbalance.
Scarcities of land for new development, as well as existing and under-construction buildings, are the main drivers. Entitlements are difficult to secure with a timeline between 24 and 30 months from start to finish. As a result, scarcity will remain the name of the game, and tenants will continue to pay increased costs to secure a building.
With roughly 29 million square feet expected to deliver over the next five quarters, vacancy should remain flat as demand stays high for these buildings. Lease rates will continue to rise as existing tenants renew while expanding tenants compete for limited space that comes to market. Total net absorption for 2021 will break the record set in 2018, likely falling just shy of 30 million square feet.
Tony Phu, Senior Executive Vice President, Colliers
Activity levels in both the Inland Empire East and West remain about the same. There are so few buildings available in each submarket that their location differences have been lost as tenants try to secure a building. The majority of new construction in the Inland Empire is happening in the East — but only because that’s where the land is. The West has become so supply constrained on a relative basis that it’s difficult to find developable sites. When they do become available, they sell and lease at rapid rates.
With vacancy rates at historical lows and rental rates continuing to increase, the Inland Empire’s industrial landscape is favoring landlords. The East submarket vacancy, which was historically 3 percent to 4 percent higher than the West, dropped from 5 percent in third-quarter 2018 to 0.7 percent in third-quarter 2021. Rental rates have increased 38.8 percent through the third quarter of this year and are expected to increase an additional 20 percent by year-end.
There are no incentives and very few concessions as free rents are practically non-existent. Tenant improvement allowances are still available in the $3.50 per square foot range depending on a tenant’s credit. Landlords are very focused on leasing to tenants with credit. This is because we now have a plethora of low-credit tenants in the market trying to lease space. Most of these are entrepreneurial firms that support ecommerce companies.
It has become quite difficult to overcome a lack of familiarity and track record within the market for new buyers. Investors are stretching on not only price, but other terms such as escrow timelines and contract negotiations to gain control of industrial assets. Sellers have enjoyed a favorable capital market dynamic, making outsized returns on their investments even if they have recently purchased a given asset.