Report: Demand for Industrial Space in Inland Empire Far Outpacing Supply

Inland Empire, Kidder Mathews, Ontario, Riverside, San Bernardino, Rialto, Moreno Valley, Jurupa Valley, XPO Logistics, National Distribution Centers, Ontario Ranch Logistics Center, Agua Mansa Commerce Center, Pacific Investment Management, Square Mile Capital, Nuveen, Newport Hill Corporation

By Catherine Sweeney 

With demand for industrial product only continuing to increase, the Inland Empire’s industrial market is showing another quarter of historic low vacancies. According to a third quarter market report for the region by Kidder Mathews, demand in the sector is only anticipated to further over the next quarter, causing a scarce amount of supply and even more competitive pricing. 

“[There is] no slowing down for industrial in the Inland Empire. Vacancies remain at historic lows across the entire region, rental rates continue to grow at a rapid pace, 10 to 15 percent year-over-year,” Gary Bargona, head of research for Kidder Mathews, said. “These trends are expected to continue during the next few years. E-commerce/logistics are still pushing demand beyond supply levels causing an imbalance between supply and demand. As a result, the development pipeline is on fire and major construction projects continue to become pre-leased or leased within a few months.” 

According to the report, direct vacancy rates dipped even lower in the third quarter to 1.6 percent, compared to the same time last year when the vacancy rate was 3.5 percent. At the same time, lease rates continue to spike. In the third quarter of the year, industrial product in the Inland Empire hit a new all-time high of $0.85 per square foot. This is a nearly 15 percent increase from the previous year when rental rates were $0.74 per square foot. 

With a lack of supply, Kidder Mathews reported a large amount of lease renewals in the region as tenants fought to keep space. However, several new lease transactions took place, with many of the larger submarkets – including Ontario, Riverside, San Bernardino, Rialto, Moreno Valley and Jurupa Valley – seeing the brunt of the leasing activity. For instance, National Distribution Centers leased 760,829 square feet of space at 3100 S. Milliken Avenue in Riverside. XPO Logistics also signed a lease for 671,913 square feet at a facility in San Bernardino, which is located at 7140 N. Cajon Boulevard.  

“The market is starting to see more renewals simply from the lack of leasable supply – there just aren’t that many options right now for tenants. Vacancy levels across the Los Angeles Basin are at historic lows, and many tenants are choosing to sign short-term renewals until more leasable inventory becomes available,” Bargona said. 

He continued, “Additionally, tenants that have some location flexibility are looking at options in [the] East Inland Empire as a lot of the newer projects are being built in those submarkets like Perris, Eastvale, San Bernardino. These extremely low vacancies have caused a high level of competition for space between tenants – with quality properties in high demand receiving numerous offers, thus pushing lease rates further up.”

As demand is expected to continue, the need for new product has never been higher. Due to the lack of space in the market, new construction in the third quarter slowed to approximately 1.9 million square feet. According to Kidder Mathews, this slow down may also be a result of increases in material prices and supply chain constraints. 

Still, approximately 24.5 million square feet of industrial product is under construction in the Inland Empire. Most recently being delivered in October was the Ontario Ranch Logistics Center. Located at 4810 S Hellman Avenue, the building totals 1.24 million square feet. An additional 1.2 million square-foot industrial property at 728 W. Rider Street in Moreno Valley is expected to be delivered in December of 2021, and the 1.18 million square-foot Agua Mansa Commerce Center, at 5400 El Rivino Road in Riverside, is expected to be delivered the following January. 

Investment activity in the Inland Empire’s industrial market also is seeing increases. In the third quarter of the year, sales volume increased nearly 50 percent, covering more than 6 million square feet of industrial product. According to Kidder Mathews, the largest transaction to occur in the third quarter was Pacific Investment Management’s $123 million transaction of an industrial property at 1110 W. Merrill Avenue in San Bernardino. The property totals 1.1 million square feet and was sold by Square Mile Capital. Additionally, Nuveen acquired Newport Hill Corporation’s 236,691 square-foot property at 2950 E. Philadelphia Street for $59.5 million. 

Both leasing and sales activity is anticipated to remain high as demand in the sector only increases. However, with demand outpacing supply, the market will likely see more lease renewals and higher rental rates continue throughout the region. 

“Strong pre-leasing is expected to continue for newer development projects, keeping vacancies at record lows. The movement towards online shopping is expected to grow at an exponential rate through 2025, driving strong demand for e-commerce distribution and warehouse space. Demand will continue to outpace supply as the Inland Empire remains one of the largest and hottest logistics hubs in the country,” Bargona said.