Small Industrial Goes Big in Inland Empire

By Dennis Kaiser

Connect Media takes a deep dive into the Inland Empire CRE market with CBRE senior industrial analyst Jamil Harkness. His insights into the small industrial market sector reveal a number of interesting trends and opportunities. Here’s the first part in a series of Q&A’s with Harkness.

 Q: Why did it take so long for the Inland Empire small industrial market to recover after the Great Recession?

A: Since the end of the Great Recession in 2010, there has not been a lot of focus placed on the small industrial market in the Inland Empire due to the robust comeback of big-box industrial product. During this time span, there were no substantial new construction deliveries. The small industrial market needed time to gain traction as occupancy gains and rates improved year over year. Strong demand cemented the recovery, and has led to more than 13 million square feet in occupancy gains since 2010. As a result of limited available supply coupled with strong demand, lease rates and sale prices have increased significantly, promoting new development activity.

Q: What are the trends being seen in terms of pricing? How much have lease rates and sale prices appreciated over the last year?

A: With interest rates at historic lows, sale demand continues to remain steady. A majority of user demand is foreign Asian buyers looking to acquire highly sought-after industrial buildings. Due to the demand generated by buyers, sale prices have increased 17.2% in the last year. Developers are building with the intent to sell to an owner/user or to an investor, capitalizing on historically high sale prices that haven’t been reached since 2007.

Lease rates continue to increase for small industrial product as rates have grown by 10.0% since the beginning of 2015. The average asking lease rate at the close of Q3 2016 was $0.58 per square foot. Size ranges that are under-built will do well in terms of leasing and development, such as product ranging in size from 20,000 to 39,999 square feet due to supply constraints. Size ranges with ample supply, such as product ranging from 40,000 to 59,999 square feet., will slow down due to the amount of new deliveries anticipated for completion in the near future.

 Q: What are the trends being seen in terms of vacancy and availability?

A: The lack of development activity over the last six years, coupled with an increase in demand, has caused vacancy in the small industrial market to plunge as vacancy at the end of Q3 2016 was 2.7%. Vacancy has remained flat in most size ranges as development has been non-existent until recently. Vacancy in the Inland Empire West stands at 2.0%, while vacancy in the Inland Empire East stands at 3.6%.

Moving forward, vacancy will remain relatively flat as strong demand continues, fluctuating within niche size segments due to the amount of new supply expected to be completed in the coming quarters. Conversely, availability has been trending up lately as landlords are eager to list their properties in hopes of drawing in a tenant at a record lease rate or a user/investor at a record sale price.

For comments, questions or concerns, please contact Dennis Kaiser