Don’t Expect Let-Up in Inland Empire Industrial Markets Anytime Soon

A booming Inland Empire industrial market experiencing record-low vacancy rates and record-high asking rates could eventually be derailed by headwinds including a nationwide decline in manufacturing, a global economic slowdown coupled with central bank intervention and threats of an ongoing trade war. But for now, rents and sale prices are expected to remain high as industrial demand remains robust, especially for larger and more modern industrial space.

A poll of Q3 2019 industrial market reports for the Inland Empire reveal a host of positive market fundamentals. For instance, Colliers International notes the vacancy rate fell 50 basis points from the previous quarter to end at 2.6%. “This is the lowest rate on record for this region, for now,” Colliers says.

Transwestern reported the Inland Empire industrial market experienced an additional 5.3 million square feet of quarterly net absorption, causing the total vacancy rate to decrease by 10 basis points to yet another historic low of just 3.3%. NKF reported net absorption in the first nine months of the year totaled 16.8 million square feet, versus 11.9 million square feet in new supply. The Q3 absorption brought the 12-month rolling total net absorption up to 20.7 million square feet, which is down 20% from the 12-month rolling total of 25.8 million square feet reported a year ago, reports Transwestern.

Demand continues to outpace supply, with below average construction completions again this quarter.

Colliers reports construction completions totaled just 2,375,600 square feet, a figure less than half the typical 5.2 million square feet added to the base every quarter for the past five years. The pace of construction completions has slowed to a trickle as construction is taking longer to complete, explained Colliers. Construction costs are up due to tariffs of 25% on imported Chinese steel and 10% on aluminum; higher costs will elevate rents, notes NKF.

Industrial asking rents in the Inland Empire increased $0.02 over the quarter to stand at $0.70-per-square-foot NNN, reports Colliers. Rents have increased nearly 15% in the past 12 months, as demand continues to outpace supply. Landlords remain bullish on rates, as vacancy rates continue to tighten, says Colliers.

NKF found that contract rents in the core basin (the West and East) currently average $0.50-per-square-foot NNN, up 34.0% from 2014. Term lengths are also longer, averaging 79 months versus 68 months in 2014.

There was more than 25.3 million square feet of space under construction in the third quarter, reports Transwestern. And there is roughly 13 million square feet set to deliver in the next six to eight months, reports Colliers, which may lead to increases in the vacancy rate. Though it noted 40% of this amount is already pre-leased, leading to positive net absorption once it is completed.

Transwestern says a total of $452.9 million in industrial sales volume was reported in the third quarter, bringing total industrial sales volume in the first nine months of 2019 up to $1.4 billion, down 16% from the same period in 2018.

Transwestern says to expect a strong end of 2019 with more cautious optimism going into 2020 despite the headwinds, because space demand remains elevated and that is pushing rents and sales prices to all-time highs.

*Pictured Dedeaux Sycamore Canyon Distribution Park in Riverside

Connect Inland Empire coming up Tuesday, November 12th. You can get more information and register to join us on this link.

Connect Industrial is coming up on November 19th in Houston. You can get more details and register to attend on this link.

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