Inland Empire Renewals Back in Vogue for 2015

Part 2 of 2

INLAND EMPIRE, CA—In part one of this two-part exclusive series, we reviewed the top industrial Orange County trends for 2015. In part two, Frank Geraci, an EVP in Voit Real Estate Services' Inland Empire office, reviews the future for the Inland Empire's industrial market, noting that things are “simply booming.”

With 5.7% vacancy and 15-16 million square feet of speculative development under construction, industrial product was the leader coming out of the recession, and remains the leader in terms of desired product type both for users looking to consolidate and institutional investors looking to place capital, Geraci says.

Emerging trends in this market include:

Internal Expansion:

One major indicator that the health of the Inland Empire market is restored is a recent influx of companies already in the Inland Empire that are now growing and expanding, explains Geraci. “Companies such as Amazon, Continental Tire, Target, Pier 1, Ashley Furniture, K&N Engineering, Restoration Hardware, UPS, and Dorel USA have expanded their footprints in the Inland Empire in the past 12 to 24 months.”

Further, companies already located in the Inland Empire continue to acquire additional buildings in the market as an alternative to leasing, he explains. Office Star Products, for example, recently purchased a third industrial building in Fontana, CA, while Chinese company PengCheng Aluminum, which already owns 1.5 million square feet in Ontario and Fontana, recently purchased a third 600,000 square-foot industrial building in Riverside for its own occupancy, he explains.

Renewals Back In Vogue

Today's industrial tenants are ready to renew, says Geraci. “Over the past four to five years, industrial tenants with a near-term lease expiration would take the time to price properties further east than their current location and return to the landlord to negotiate against those lower rates.”

Alternatively, he says, “today's tenants are simply choosing to renew and pay an increase in rent instead of disrupting their business with a relocation.”

One example he points to Prologis' portfolio, which has been kept at a 98% occupancy this part year. And another client Voit works with, Shea Properties, has renewed half of its two-million-square-foot industrial park in Ontario without experiencing any loss or vacancy.

E-Commerce Moved In and Ready

Another trend to watch for 2015 includes e-commerce and same-day/next-day delivery companies that didn't exist before recession, which Geraci says, are now in the Inland Empire and absorbing astounding amounts of square-footage. 

Amazon, for example, has grown from no presence in the market in 2011, to now encompassing six million square feet of space in the cities of San Bernardino, Redlands and Moreno Valley, California.  “It is expected that E-commerce will be a big driver of future absorption of bulk-space, perhaps at the expense of some retailers who will not survive in the new era of mobile commerce.”

Land Grab In Progress

Land values continue to demonstrate strong increases in the Inland Empire, and developers are moving quickly to acquire any and all land that is vacant, explains Geraci. “In a further testament to the strength of the local industrial market, industrial developers are willing to pay more for land that is zoned (or can be zoned) for industrial than they are for land zoned for office or retail.”

In fact, he explains, “developers in the market are increasingly trying to downzone land, taking property that is currently zoned for office or retail use and converting it to industrial.” Entitled property commands an even higher price, he adds, “as the speed to delivery for finished buildings is accelerated, therefore possibly avoiding any potential market corrections down the road. And, institutional capital is willing to place an even higher premium for a building that is “forwarded” to them vacant at a fixed price, thereby eliminating pricing risk.”

Spec Development for Smaller Buildings Now Underway

“While development of big-box product has been underway for the last several years, today's news is that developers are now also pushing to develop smaller industrial buildings to meet demand, as the vacancies for smaller buildings has dropped dramatically in the last twelve months and rents and sales prices for these smaller buildings have notched up substantially.”

According to Geraci, this activity is attributed to the returning demand from smaller users and mom-and-pop businesses, along with the low interest rate environment, and is further evidence that pricing in all size ranges is back to peak.

Relocations Will Increase in 2015:

In addition to the strong activity from tenants, landlords, and developers already in the Inland Empire, relocations from parts of Los Angeles and Orange County will be the new trend in 2015, Geraci explains.

“Industrial tenants, owner-users, and investors will find that, even at the peak pricing that the Inland Empire has returned to, prices in this region are 30 - 50% lower than product in the South Bay and Orange County,” he says. “This movement is already underway, as a variety of companies have made the move in 2014, including Owens & Minor, Yokohama Tire, Samsung, and Deckers Brands (makers of UGG boots).”

Overall, Geraci says that industrial values and rents are forecasted to increase in the Inland Empire in 2015.  “This is a prime time in the market, and for those who want to leverage this momentum in order to make the best decisions for their companies and their bottom lines, this is most certainly a time for action.”

Want to hear more about the Inland Empire? Don't forget to register for our RealShare event there on January 29^th!