Facing yet another quarter of a slowing economy, the Inland Empire real estate market has begun to feel the effects of the dwindling economy.
The Inland Empire had more than 4.2 million square feet of industrial activity in the fourth quarter, representing a decline from the third quarter. However, there were some notable deals that occurred last quarter, including a 598,741-square-foot lease signed by J. M. Smucker Co. in San Bernardino, as well as the 484,250-square-foot lease signed by UTi Integrated Logistics Inc. in Fontana.
The Inland Empire saw another quarter of increased availability and vacancy levels, due in part to newly completed construction as well as the addition of sublease space coming onto the market from businesses consolidating or closing operations. Third quarter’s availability rate of 13.6% increased by 7% to 14.5%, or a value of just more than 4 million square feet of newly available space. The vacancy rate increased 16% or 5.3 million square feet to stand at 9.4%. The Inland Empire’s development pattern continues to be a direct result of the economy.
Developers have halted many planned projects and now are waiting until the national economy shows signs of regaining some stability before proceeding with any future projects. In some extreme cases, developers have stopped construction after breaking ground to minimize the monetary loss associated with delivering space to the market without strong user or tenant demand.
It’s Official
As announced by the National Bureau of Economic Research, the U.S. has been in a recession since December of 2007, making official what many already believed. Unfortunately, the national and Inland Empire economies show signs of a slow recovery. As the new year begins, the factors that contributed to the current crisis,the subprime mortgage meltdown, housing market slump and rising unemployment,continue to impact the business environment. Locally, the Inland Empire’s economic condition continues to deteriorate as many companies decrease payrolls, constrict budgets and contract space requirements. Some companies are evaporating completely.
The timing of this slowdown coupled with the large amount of office construction,2.6 million square feet for the year,has led to decreased demand on top of an increasing supply. In response to both the local and national economy, the Inland Empire office market has transformed. The balance of market power has shifted toward the tenant and away from the landlord.
Tenants are reaping the benefits of multiple prime location options, additional concessions and tenant-friendly lease terms, which translate to higher tenant improvement allowances, discounted lease rates and free rent, resulting in lower effective rates.
Following a relatively fast-paced third quarter of activity, the pace of leasing slowed during the fourth quarter as deals took longer to complete.
Fortunately, this delay in demand will eventually be offset by a decrease in supply since office construction finally slowed in the fourth quarter with no new major construction starts and just a few projects left in the pipeline. As these projects are delivered to the market in the coming months, vacancy levels will increase; however, with nearly 2.6 million square feet of new supply delivered last year, the marketplace will continue to create new prospects for progressive and aggressive tenants who would like to take advantage of the abundant and tenant-favorable leasing opportunities.
Analysis provided by CB Richard Ellis Group Inc.
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