Sales prices in the Inland Empire’s East Valley market have increased exponentially, according to a second quarter industrial market report from Lee & Associates. While slowing down slightly from the first quarter of the year, the report showed activity in the sector remains strong with tenants and investors alike competing for space in the market.
“I think the one thing that stands out to me is the incredible spike in rental rates and sale prices…there’s an insatiable appetite with low interest rates to buy and there’s just not much out there so sales prices have just gone through the roof,” Dwight Hotchkiss, president with Lee & Associates’ Riverside office, said.
According to the report, average sales prices increased in the second quarter of 2021 to $185.19 per square foot. At the same time, gross lease rates in the East Valley market were $0.86 per square foot in the second quarter of the year, while triple net rates increased to $0.89 per square foot.
High costs are likely due to the extremely low vacancy rates in the region, Hotchkiss said. In the second quarter of 2021, vacancy rates in the region decreased to just 1.24 percent. According to the report, this likely will cause new development to be absorbed quickly.
However, with the lack of available space, gross absorption in the second quarter of 2021 totaled 3.9 million square feet. Through 2020, absorption totaled 22.7 million, with Lee & Associates reporting approximately 11 million square feet absorbed in the second quarter of 2020.
“I think it’s a combination of an incredibly high demand and that there just isn’t a lot of product out there, and it’s not because things aren’t being built but I just think the pandemic exposed the need for supply chain restructuring and then the Inland Empire is an area where people have to and want to be because of the ports,” Hotchkiss said.
As demand in the sector continues, Lee & Associates predict that developers will still continue to build, with the potential to develop new product outside of their preferred geographical location as finding available space continues to be an issue in the region.
“I think the thing that we’re noticing, and it’s been a thing we’ve noticed for the past several years, is development has moved further and further east and at what point does somebody feel like it’s too far east?” Hotchkiss said. “I think developers, to their credit, have been in this eight year run of a robust industrial market, they’ve been really disciplined in what they’ve developed…I think they’ve been really thoughtful in their approach, gauging demand and trying to use that as a future predictor.”
However, space constraints do not mean that no new product is being delivered to the market. According to the report, 14.3 million square feet of industrial space is under construction in the second quarter of 2021,with 90.7 percent of the total in the 100,000 square-foot range. This is a 3.6 percent increase from the previous quarter, according to the report.
Additionally, ten new industrial properties were completed in the East Valley during the second quarter of the year, encompassing 1.5 million square feet. 24 buildings also are projected to be completed in the third quarter of 2021 totaling 4.2 million square feet.
“For the rest of this year and into next year, we remain pretty bullish as the economy comes out of COVID-19 and vaccinations and things opening up…I see for at least the next year, there will continue to be demand,” Hotchkiss said.
