The Inland Empire industrial market rebounded from a slow second half in 2006 to post a higher volume of leasing activity as well as lower vacancy rates, while continuing to experience strong construction completions and positive absorption in the millions.
Booming foreign trade had a significant impact on the Inland Empire industrial market as retailers and other companies absorbed space in a market that is one of the most logistics-friendly in Southern California, thanks to its central location with easy access to the ports, airports, railways, and interstate highways.
Direct Vacancy vs. Rental Rates
With 8.2 million square feet of industrial space leased, the Inland Empire experienced its strongest quarterly leasing activity since the first quarter of 2005.
The most significant rebound in leasing activity was in the Inland Empire’s western region where 5.1 million square feet was leased, 2.1 million square feet higher than the 3 million square feet leased in fourth quarter.
Strong activity in the west is attributed to several things, including closer proximity to the ports and transportation alternatives. Despite the high level of leasing activity, the overall vacancy rate decreased only slightly during first quarter to 5.7%, a 0.4 percentage point decrease compared to the fourth quarter.
Substantial construction completions, 4.3 million square feet in the first quarter, as well as decreased user sales activity, were the main hindrances to further decreasing the overall vacancy rate. In the Inland Empire East, where 57% of the newly completed construction is located, the vacancy rate increased 0.6 percentage points to 10% during the first quarter.
Of the 16.1 million square feet of new construction expected to be completed, 83.4% is in the Inland Empire East.
Despite the attractiveness of industrial space in the Inland Empire West, the east will soon be the only location for prospective new tenants. Available land for new industrial development in the West is quickly dwindling, evidenced by the continued decline in its vacancy rate to 4%, a 0.7 percentage point decrease compared to the fourth quarter.
Despite the high demand for space and declining vacancy rates, the overall average rental rate declined slightly to 46 cents per square foot per month, 1 cent less than in the fourth quarter. This is due to an increase in new big box construction with lower average rental rates, coupled with much lower vacancies in smaller buildings with higher rents. It is not in any way an indicator of a slowdown in the market.
The Inland Empire experienced a strong quarter overall, reminiscent of the record breaking quarters experienced in 2005.
Leasing activity should continue to increase in the coming quarters. Demand is expected to remain high, partly due to tenants continuing to opt to lease due to sky high asking purchase prices. This strong leasing activity, as well as lower projected construction completions during the rest of 2007, should further decrease the overall vacancy rate and absorb a majority of the vacant first generation space on the market, resulting in increased rental rates and net absorption.
Overall, the Inland Empire remains one of the most desirable industrial markets in the U.S. and is expected to maintain its position in the coming years.
Analysis by Cushman & Wakefield Inc.
