The Inland Empire industrial market continued to show no signs of deceleration as gross activity remained strong in the first quarter, totaling 9.6 million square feet. Midsized and small product accounted for a majority of the activity, which is a good omen as the market continues to strengthen.
The market remains favorable to landlords, despite an uptick in vacancy. Market rents have risen 25% since 2010. CBRE EA predicts they’ll grow this year by 12.6% and that net absorption will be 16.4 million square feet, slightly lagging behind new supply deliveries.
A slight drop in average asking lease rates over the quarter can be attributed to the softening of rental rates for product ranging from 600,000 to 800,000 square feet, particularly in the Inland Empire East. The smaller the product, the larger the rental growth should be this year.
The overall vacancy rate ended the quarter at 4%, up from 3.3% in the fourth quarter. We expect vacancy to be moderately volatile throughout the year as supply comes to the market.
Availability followed a similar trend in direct correlation with vacancy due to new completions and available supply. It should continue to vary this year as activity lags new supply.
The market generated 9.6 million square feet of gross activity during the quarter, led by e-commerce, consumer goods, and third-party logistics-type tenants like Amazing Foods, Ozburn Hessey Logistics and Munchkin. We predict over 18 million square feet of completions by year-end.
Office Market
The Inland Empire office market has significantly improved over the past five years on the back of the strongest employment growth in Southern California.
The average asking lease rate continued its slow upward drift during the quarter, increasing 3 cents to $1.86 per square foot, and Inland Empire West was responsible for most of the growth.
Vacancy continued to drop due to increased activity in class B and C space, enabling landlords to raise rents. The rate declined to 14.4% from 14.7% in the fourth quarter. Occupancy improved in both submarkets. The quarter was the 16th of the past 17 quarters to have positive net absorption.
Overall, the quarter reinforced the “slow but steady” dynamic that has aptly described the office market during the recovery and expansion. A growing population and work force is opening up opportunities and needs for government, healthcare, insurance and business services companies. The prevailing trend of lease activity driven by those tenants continued in the first quarter and is likely to do so in the near future.
Analysis provided by CBRE Research
