As 2009 progresses, the Inland Empire industrial market continues to endure the challenges of unyielding economic times. The ongoing budget crisis of our nation continues to impact local demand, vacancy levels and rents. The Inland Empire, which once stood out as the “low cost alternative,” is now seeing the impact this recession is having on tenants as many decide to close shop, not renew leases or cut their losses.
With slightly more than 4.6 million square feet of activity, the overall Inland Empire market did see a 10% increase of leases and user sales from the fourth quarter.
This increased activity is a result of some notable leases, including a 600,000-square-foot build-to-suit lease signed by Home Depot Inc. in Redlands, as well as a 517,346-square-foot lease signed by Kenco Logistics, also in Redlands. Additionally, a 407,948-square-foot user sale occurred first quarter in Moreno Valley, which was purchased by Ozark Automotive Distribution.
Developers have halted plans for new industrial projects indefinitely and buildings under construction have been put on pause. Currently, there is nearly 2.2 million square feet in the construction phase. This denotes a significant 81% decrease of construction since the first quarter of last year.
The Inland Empire maintained steady availability and vacancy levels in the first quarter. Fourth quarter’s availability rate of 14.5% increased slightly to 14.7%, or about 1.2 million square feet of available space. Conversely, the vacancy rate decreased 1% to 9.3%. The Inland Empire East vacancy level declined to 13.8% in the first quarter from 14.4%, whereas the Inland Empire West submarket increased to 6.5% from 6.3%.
Office Market
The beginning of 2009 bears much similarity to 2008. The constant uncertainty of the global, national and local economies has caused hesitancy in tenants’ decision making. Tenants have taken a “wait and see approach” to major business decisions, including real estate.
The local unemployment in the Inland Empire has skyrocketed to 12.2% and total office employment lost 4,600 jobs in all business categories in the first quarter. The overall vacancy and availability for the region increased to 21.8% and 25.1%, respectively. The Inland Empire region posted a negative 75,116 square feet of absorption.
It is not all bad news for 2009. Construction finally began to slow in the fourth quarter and now only a few projects remain in the pipeline. Office leasing activity has begun to increase and the amount of negative absorption has decreased.
The Inland Empire region is slowly regaining its title as the low cost alternative. Most Inland Empire economists are predicting a slow recovery in late 2009 or early 2010.
The current economic conditions have created a tremendously beneficial situation for the tenants. The market control has shifted away from landlords and now tenants are determining the market and enjoying the benefits of multiple prime location options, additional concessions and more tenant-friendly lease terms. That translates to higher tenant-improvement allowances, discounted lease rates and more free rent, resulting in lower effective rents.
Analysis provided by CB Richard Ellis Group Inc.
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