Demand for office space remains high as businesses look to take advantage of the area’s growing population and more affordable office space compared to other areas of Southern California.
The Inland Empire office market has evolved from a region dominated by small company branches serving just the Inland Empire to a significant office market where companies now are looking to house their headquarters.
This is evident in the large leases seen in the first quarter, by companies including Cemex, Just Mortgage Inc., and Co-Op Financial Services. These leases, as well as others, increased leasing activity significantly in the Inland Empire to 544,533 square feet, 45.7 percentage points higher than the 373,606 square feet leased in the fourth quarter.
The elevated level in office space activity in the Inland Empire, especially within the class A sector, further propelled rental rates upward in the first quarter. The overall rental rate in the Inland Empire ended first quarter at $1.98 per square foot/per month, 4 cents higher than at the end of last year.
The most significant rise in rental rates continued to be in the class A market, which increased to $2.14 per square foot per month, a 4 cent increase compared to the previous quarter and a 19 cent or 9.7% increase compared the first quarter in 2006.
This increase in rental rates resulted from continued high demand and a sharp decrease in vacancy rates compared to previous years. Construction activity didn’t meet expectations as a few large projects have been delayed until early second quarter. However, an additional 159,547 square feet was completed, down from 316,066 square feet of new construction completed in the fourth quarter.
New construction in the Inland Empire office market is expected to increase in the coming quarters with more than 1.5 million square feet slated for completion before the end of this year.
The Inland Empire office overall vacancy rate declined markedly during the first quarter to 10.3%, 0.6 percentage points lower than the previous quarter. The lack of new construction in class B space coupled with strong leasing activity in all building types were the main reasons for the decline.
The class A market didn’t experience a decrease in vacancy rates; however, the market could not keep pace with 85% of new class A construction that was completed and vacant. That increased the overall vacancy rate 0.5 percentage points, compared to the previous quarter, to 11.3%.
As new development further increases in 2007, look for vacancy rates to increase. However, rental rates will continue to climb in the coming year as landlords take advantage of the strong tenant demand. A large portion of the vacant space on the market from new development during the past few quarters is expected to be leased, increasing net absorption.
Overall, the Inland Empire office market, with its lower rents, newly constructed office buildings and diverse amenities will continue to increase its existing tenant base, and will compete with OC and Los Angeles as an ideal headquarter location within Southern California.
Analysis by Cushman & Wakefield Inc.
