By Kate Snyder
Despite overall economic uncertainty, the Inland Empire has continued attracting a variety of firms seeking to consolidate industrial operations into large, “state-of-the-art” facilities, according to Colliers’ 2022 Q3 Inland Empire Industrial Research Report.
The Inland Empire represents 35 percent of the total industrial space in greater Los Angeles for buildings 10,000 square feet and greater, according to the report, and 77 percent of its space in this market is in buildings 100,000 square feet and greater. The region comprises approximately 593.3 million square feet in total, and the vast majority of its space was built in the past 22 years.
“With inflation at a 40-year high, rising interest rates and overall economic uncertainty, we can expect investors to take their foot off the gas until the economy normalizes,” the report states. “With an all-time low vacancy and record-high rent growth, investors are highly competitive in greater Los Angeles as the big players look to increase their industrial portfolio in Southern California.”
The report states that net absorption closed out the third quarter at 2.9 million square feet, and construction activity is strong with 42.6 million square feet underway. Net absorption failed to surpass new supply for the third quarter, as it had for the previous two quarters. However, Jace Gan, vice chair for Colliers Greater Los Angeles, said that uncertainty in the Inland Empire’s industrial market is starting to have an effect on demand.
“We have seen tenant demand slow and will see rent growth and lease rates start to taper off the pace we were on,” Gan said. “The Los Angeles market, and thus, the Inland Empire, is very port driven and with port traffic down almost 25 percent, we are seeing the ripples.”
Even in the midst of ongoing uncertainty, the Inland Empire stands out both for its unprecedented rental rate growth, per the report, as well as having one of the lowest vacancy rates in the country. With an increase to 0.7 percent, the region’s overall vacancy still remains the lowest in all of greater Los Angeles. In the west, vacancy slightly decreased to 0.5 percent whereas the east increased to 1 percent – the report attributes this to recent projects that were delivered without tenants.
In rental growth, the region’s overall average asking rent closed out at $1.56 per square foot, which was a 1.3 percent increase compared to the previous quarter, a 58 percent spike year-over-year and a 120 percent difference compared to the beginning of 2020.
In the next 12 to 24 months, Gan predicted the market would trend toward a standoff between landlords and tenants, but said that “ultimately, our vacancy remains low, so the market will remain competitive.”
Out of the region’s 42.6 million square feet under construction, approximately 25 million square feet is expected to be delivered in the next two quarters. Currently there are 77 buildings over 100,000 square feet that are under development, and 22 of those are already pre-leased. The report also posited that as land continues to become scarcer in the west, the eastern boundary of the Inland Empire will continue expanding outward.
“The main challenge that we face is that more cities continue to place restrictions and moratoriums on warehouse space and the development of industrial projects,” Gan said. “What is going well is there is still a high barrier to entry and a limited supply.”