Inland Empire Industrial in a Perfect Balance

The industrial market is undeniably strong throughout Southern California, but while the costal markets are suffering from a severe supply shortage, land shortage and dramatically increasing rental rates—a problem only from the tenant perspective—the Inland Empire market is seeing a happy equilibrium between supply and demand, along with steadily rising rental rates that are still a discount to the coastal markets. We sat down with Frank Geraci, EVP and partner at Voit Real Estate Services who recently secured a $33 million lease of a 750,000 square-foot industrial warehouse in the five-building Shea Center Ontario business park in Ontario, California, to get an inside look at the leasing activity in the Inland Empire.

GlobeSt.com: In general, what has the industrial leasing activity in the IE been like this year and how does it compare to the same time in 2017?

Frank Geraci: Industrial leasing continues to perform exceptionally well in the Inland Empire, driven most prominently by the availability and quality of the product. Industrial users seeking space in Southern California are increasingly expanding their search to Inland Empire facilities based on tremendously tight, sub-one-percent vacancy in nearby markets such as Orange County and Los Angeles, and the need for buildings that can accommodate today’s logistical needs for “cube” and velocity.

As space becomes harder and more expensive to find in these coastal markets, the Inland Empire, which is currently at a healthy 4.1 to 4.5% vacancy, is emerging as the right fit for an increasing number of industrial occupiers. Since the end of the recession, leasing activity has been consistent and in equilibrium. Because of this, we continue to see rents escalate, while demand and supply are well balanced, resulting in ongoing health for industrial property owners and investors in this market.

Globest.com: What types of projects are the most sought-after and why?

Geraci: Right now, the most significant demand in the market is for spaces under 200,000 square feet and above 500,000 square feet. This activity is being driven by the health of the local economy. An increasing number of companies are starting up in the region, fueling demand for smaller spaces, while many existing companies are expanding in and into the region, seeking large big-box space.

GlobeSt.com: What types of users are the most active in the market?

Geraci: This market attracts industrial users from a wide variety of sectors. The primary driver for Inland Empire industrial is the need for reliable distribution – a need that is shared by nearly all companies.

It’s widely known and understood that e-commerce is driving the growth of industrial markets throughout the nation. One point to note, however, is that it is not only e-commerce giants that are fueling this growth. Today, nearly every company in every industry is factoring online sales into their current and future space needs. With that, any company that delivers a product needs some level of e-commerce distribution. Even small businesses are selling through industry giants such as Amazon or eBay, relying on these services to help them ensure delivery of their products.

Transportation companies such as UPS, FedEx and DHL are growing exponentially in tandem with e-commerce. As the demand for same-day and next-day delivery increases, this translates into additional space needs, which continues to fuel growth in the Inland Empire. By way of example: consumers—particularly millennials—rarely have time to cook or shop and are relying more heavily on prepared meal delivery. Consumers now order food through cell phone apps and the like, and expect it to be delivered within an hour, which accelerates the pace of logistics and delivery.

GlobeSt.com: How has demand impacted lease rates and availability?

Geraci: Industrial lease rates in the Inland Empire are consistently rising because of the continued demand from occupiers. Each high water mark made by a lease is quickly followed by a new, higher mark. Lease rates are up approximately 9% per square-foot in the last year and we expect additional increases of three to four percent on an annual basis in the near term. Even though rents are at an all-time high for the market, the Inland Empire still remains more affordable, and the buildings are more efficient than neighboring infill markets. Rents in the Inland Empire are 40 % lower than Los Angeles and Orange Counties. As a result, we will continue to see companies relocate to and expand in the Inland Empire in order to satisfy their capacity for growth and to stay competitive.

GlobeSt.com: How do you think new construction activity will impact leasing activity in the future?

Geraci: We are fortunate to remain in-balance in terms of demand and supply. Even after adding more than 22 million square feet of industrial product in 2017, absorption has been steady, demand is strong, and vacancy remains low.

Much of this is self-regulated in the market. Because of the amount of time it takes to bring land through the entitlement process, there is a limitation on the amount of product that can be added into the market on an annual basis. This furthers the aforementioned equilibrium in the market. Barring a political problem of catastrophic event, the market is delivering enough product to satisfy demand without becoming overbuilt.