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.
For comments, questions or concerns, please contact Dennis Kaiser