The Inland Empire office market has advanced quietly in the past five years.
There’s still no construction in the pipeline, and the market would likely have to tighten further to put enough upward pressure on rental rates to warrant development. It does keep setting post-recession highs in all key fundamentals.
The average asking lease rate continued to slowly move up during the quarter, increasing 1 cent to $1.87 per square foot. Most of the growth occurred in Inland Empire West, where asking rates increased 5 cents to $1.90 per square foot.
Asking rates in Inland Empire East were flat. Asking rates in the west are now higher than in the east for the first time since the second quarter of 2013, and demand for space continues to strengthen there.
The year-over year asking rate increased 13.1% in the west compared with just 2.2% in the east. The year-over-year asking lease rate in the San Bernardino submarket increased an impressive 7.1% and largely was responsible for the overall asking rate growth in Inland Empire East.
Asking rates in the eastern and western submarkets over the next four quarters should increase by 2% to 2.5% as the double-digit lease rate growth in the west starts to slow.
Vacancy Rate, Absorption
The region’s vacancy rate declined to 14.1% from 14.4% in the first quarter. Occupancy improved in both submarkets. It was the 17th out of the past 18 quarters with positive net absorption, despite the overall slow pace of growth.
Activity was flat in most cities, with Rancho Cucamonga, San Bernardino and Corona the exceptions.
Net absorption was the highest in Corona, where it totaled 27,916 square feet. Net absorption was also strong in San Bernardino, with 19,249 square feet of positive absorption that pushed down the vacancy rate from 20.5% to 20.1%.
It was a positive quarter for the east, which accounted for 69.2% of the positive absorption during the quarter.
The second quarter reinforced the “slow but steady” dynamic that has aptly described the Inland Empire office market during the recovery and expansion. Market fundamentals in the region have steadily improved since the recession, and those gradual improvements seem almost certain to continue in the near term.
Net absorption has been continually positive, and the vacancy rate has fallen 39% since the fourth quarter of 2010.The Inland Empire over the past year has been the 12th fastest growing metro in the United States in terms of employment.
Outlook
CBRE Econometric Advisors predicts growth of 2.1% over the next four quarters and that office employment, defined as “certain categories within the financial and service employment sectors in which workers typically occupy office space,” will expand by 1.7% per year over the next six years, down from its previous forecast of 2.4%. Office employment increased a modest 1.2% for the 12 month-period ending in May.
Affordable housing in the region should continue to drive labor force growth, which in turn should help bolster employment and incomes. The current median price of an existing single-family home in Riverside County is 24% lower than in Los Angeles County and 52% lower than in Orange County, according to data from the California Association of Realtors.
Demand for affordable housing in the Inland Empire helped push up construction employment by 6.5% for the year ended in May.
Analysis provided by CBRE Research
