Due to more affordable pricing and its less populated location outside of Los Angeles, the Inland Empire’s office market is beginning to make a comeback. According to an Inland Empire third quarter market report from Newmark, rental rates are beginning to rise as more office assets are absorbed in the market.
During the third quarter of the year, the report showed that vacancy in the region has gone down slightly from 11.4 percent to 11.3 percent quarter-over-quarter. At the same time, net absorption reached 18,518 square feet bringing the year-to-date total to 48,948 square feet. This caused rental rates to increase to $1.98 per square foot per month, approximately 5.2 percent year-over-year.
“Over the past year the average asking rent managed to rise modestly by 5.2 percent, due in large part to the lack of new construction. Vacancy increased only slightly since the start of the pandemic in the Inland Empire – compared to steeper increases in Los Angeles and Orange County – due to the large percentage of government agencies and industries serving the local population that lease office space in the market and continued to have need of office space,” said Brent Don, senior research analyst with Newmark.
Most of the leasing activity was observed in the Riverside submarket, with small lease transactions making up the bulk of activity. Much of the activity was also absorbed by tenants in healthcare, financial, insurance and real estate industries, according to the report. For instance, Smart Choice Heating and Air leased 7,336 square feet at 2020 Iowa Avenue in Riverside. EXCEED also leased 6,400 square feet at 170 Wilkerson Avenue in Perris.
“The Riverside submarket has seen the most leasing activity, which is not surprising given that it also has the largest existing inventory. Downtown Riverside, which is highly walkable, has multiple amenities and is home to Riverside County’s courthouse (appealing to nearby legal-service office occupiers), also comprises a fair share of the submarket’s inventory,” Don said.
He continued, “Most of the leases that were signed during the pandemic were relatively small as tenants played it safe, and the Inland Empire tends to attract companies that are looking for an affordable alternative to the expensive rents found in the adjacent Los Angeles and Orange County markets.”
Riverside County also saw several large-scale sales transactions, but most were observed in the Inland Empire’s Airport submarket, according to Newmark. The largest sale in the third quarter was in Riverside, where a local doctor’s office purchased a 46,089 square-foot facility at 3550 Vine Street for $11.39 million. Zion Enterprises also purchased a 45,094 square-foot office building at 1500 S. Haven Avenue in Ontario for $9.1 million.
“The Airport submarket saw the most sales activity over the past year, although Riverside was a very close second. Ontario International Airport is based in the Airport submarket, in addition to notable retail centers such as Ontario Mills and Victoria Gardens. The submarket also benefits from pronounced apartment development and its proximity to Orange County and the eastern reaches of Los Angeles,” Don said.
While leases and transactions were limited to smaller facilities, Newmark anticipates continued improvements in the sector as the economy recovers. As of October, the Inland Empire’s unemployment rate is 6.3 percent, which is the lowest rate since the start of the pandemic. Government jobs also are returning, which has helped aid in the overall recovery of the Inland Empire’s office recovery. Additionally, the Inland Empire is home to many employers in the logistics industry, which has aided the office market indirectly by boosting the overall economy, the report states.
“The best economic drivers for the Inland Empire are its growing population tied to affordable housing relative to neighboring counties and its growing logistics industry. Government offices, healthcare companies and companies that serve the local population will have a growing need for office space,” Don said.
“There will also be a number of shipping companies that desire local office space near the massive warehousing and distribution facilities in the Inland Empire, as well as related companies in the e-commerce and third-party logistics industries that will rent office space to be near their clients. If the economic recovery grows strong enough in the region, the Inland Empire may start to see new office construction, which has been very low since developers were hurt by the collapsing demand for office space following the Great Recession.”