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California  + Inland Empire  + Industrial  | 

Rents Drive “Crazy” Asset Appreciation

By Dennis Kaiser

Connect Inland Empire brought together more than 300 commercial real estate professionals in Chino for a full afternoon of CRE conversations and networking. Three deep-dive panel discussions featured some of the region’s top CRE leaders who shared insights on trends shaping the market.

The investment panel covered the abundant opportunities in the Inland Empire that are being driven by e-commerce and the need for fulfillment infrastructure, as well as industrial manufacturing and warehousing. Top dealmakers and investors discussed the investment climate and how it is faring compared to the rest of the SoCal market, whether the current conditions are sustainable long-term, and what to expect for the year ahead.

Duke Realty’s Paul Jones says it is a great time to be in the Inland Empire on the investor side. The question is if tenants will be willing to pay. He notes the Inland Empire has a number of factors that remain in its favor, ranging from a large population base, ease of transportation, land constraints and barriers elsewhere. It all adds up to a “perfect recipe for real estate investors.” He adds, the “crazy asset appreciation is due to rent growth, not cap rate compression.” Jones says, Class A cap rates have not compress all that much in the past 12 months, perhaps in the 10 to 15 BPS range. Class B has experienced more compression, which falls into the 35 to 40 BPS range. But he’s not sure what will slow things down and expects there to be more “room to run” in the current cycle.

CBRE’s Joe Cesta says the Inland Empire is in a strong position, following 31 straight quarters of positive net absorption. He notes that in the rent versus labor conversation, today’s location decisions now involve a company’s HR representative, not just a real estate director. For some companies, “labor far outweighs rent in decisions now.”

Marcus & Millichap’s Cody Cannon notes since 2013 the Inland Empire has experienced some rather “dramatic changes” in the number of jobs, wage growth, and retail sales, all of which is driving compression in cap rates. For investors, rent growth has provided stable cash flow. That’s created a perplexing situation. They wonder, if they sell, where would they move that capital. Cannon says he doesn’t see anything on the immediate horizon to be concerned about. Part of the reason is because over the past 10 years the positive changes have combined to put the Inland Empire in a “better position than in the past to weather a potential storm.”

Rexford Industrial’s Patrick Schlehuber says tenants are shifting to the Inland Empire because the newer modern industrial product found there tends to be a “better product than in the denser markets that are land constrained.” He points out that investors are drawn to the Inland Empire because the homogenized Class A product in the closer-in markets is attractive to tenants. Schlehuber sees a “tremendous runway” remaining in the market cycle with no economic factors to “slow things down.” In fact, he expects to see double-digit rental growth in the near term for some Inland Empire west markets in the coming 12 months.

City of Moreno Valley’s Mike Lee says the city has found success in attracting companies and developers by acting more like a “Nordstrom’s when it comes to their approach to customer service.” That includes investing in developing resources to expedite the development process, like an online portal to check project status, as well as offering its own electric utility.

Lee says developers are now pursuing smaller deals as they shift to meet demand for occupiers in the smaller building size. In the past, they were building projects larger than 400,000 square feet. Now, they are pursuing development projects in the 100,000-square-foot range, typically for support services for the larger companies that have relocated to the area.

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About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.

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