The Golden Age of the Inland Empire industrial market pushes on as major e-commerce players continue to absorb large blocks of industrial space. Mid-size and smaller tenants have flourished immensely, cementing the trend of solid tenant demand.
Most size segments remained slanted in the landlord’s favor, with the exception of buildings in the 600,000- to 850,000-square-foot range, where there’s been a boost in activity from 300,000- to 450,000-square-foot users due to pent-up demand in that segment. Alere divided its 700,712-square-foot building in Fontana and leased approximately 475,076 square feet to Delta Enterprise Corp. in the second quarter.
The overall market remains poised to benefit from the many logistics advantages and ongoing development activity as container volumes at the ports continue to outperform the previous year’s volumes.
Rents in the Inland Empire continued to grow due to rising industrial employment, pent-up demand for industrial space and consumer spending. The overall average asking lease rate in the quarter was 50 cents per square foot, up 6 cents per square foot over the first quarter. Year-over-year average asking lease rates increased 23%, the biggest year-over-year growth since the previous peak in 2006 and 2007. Steeper rent growth in smaller product is projected in the second half of the year.
The vacancy rate closed the quarter at 3.7%, a level not reached since late 2006 to early 2007. The Inland Empire West rate continued to fall due to tenants’ desire to be closer to the ports to mitigate transportation costs, and the submarket looks much like an infill market, mirroring vacancy rates of submarkets farther west, such as Orange County. The Inland Empire East vacancy rate continued to fluctuate, rising incrementally due to the endless wave of newly completed industrial product hitting the market each quarter. We expect the rate will sway moderately up and down through year-end and that more than 20.6 million square feet of completions will hit the market.
Availability follows a similar trend to vacancy, though most industrial spaces listed as available are occupied by tenants that want to renew their leases, freeing them from searching for space in the constricted market. The drop in availability is projected to continue through the second half of year, reaching 6.9% by year-end.
Development continued at an unprecedented pace, and 15 buildings totaling over 5.7 million square feet were delivered, 2.8 million square feet of that preleased to logistics and e-commerce related tenants, including QVC and Medline Industries Inc. The robust wave of construction activity throughout the region has raised concerns of overbuilding, though developers have been cautious to avoid the kind of mistakes that contributed to the Great Recession. Many also plan to deliver most of their projects by the end of 2017.
Analysis provided by CBRE Research
