The Riverside, California, office of Lee & Associates has released its first-quarter 2018 Industrial Market Summary for manufacturing/distribution buildings for the East Valley Market in Southern California’s Inland Empire. The report, which was which was prepared by Caroline Payan, director of marketing and research of Lee’s Riverside office, found that in the first quarter of 2018, even with a lack of inventory, the market still posted strong activity and gross absorption.
Gross absorption for 2017 totaled 16.9 million square feet, continuing on the heels of the strong absorption performances in 2016 of 19.3 million square feet and 2015 of 15.3 million square feet, Lee reports. Gross activity in the first quarter was 10.6 million square feet, with investment purchases and lease renewals accounting for 44.7 percent of the total.
Big-box development projects continue to move forward, mainly being driven by companies with an e-commerce component. However, there continues to be a lack of supply in the 50,000-square-foot to 399,999-square-foot range with very few developments scheduled to address this need.
“While absorption remained steady in the first quarter of 2018 and is expected to continue throughout the remainder of 2018, it appears it may not be as high as the previous year,” says Lee & Associates Riverside president David Illsley, noting that first quarter 2018’s absorption figures were 5.8 million square feet, compared to 2.9 million square feet during the same period last year.
Vacancy rates increased slightly in the first quarter to 6.0 percent. The remainder of 2018 is projected to show an overall stable vacancy rate, although it may rise given a projected increase in new supply. Bulk distribution space continues to be in high demand, with many companies still moving east of the L.A./Long Beach ports to capitalize on lower asking rates and sales prices. Vacancy rates in the big-box segment and small buildings under 50,000 square feet will most likely rise in the short term as new developments are delivered throughout 2018.
The base for first-quarter industrial space under construction represented 16.5 million square feet, with 91.5 percent of the total in the 200,000-plus-square-foot range, a 6.5 percent increase over the previous quarter. There were seven buildings that completed construction in the East Valley in the first quarter, with 32 new buildings projected to be completed in the second quarter of 2018. Development of new industrial buildings will continue on projects already in the pipeline over the next year; however, that is expected to slow down after new development is completed.
Average asking and actual sales prices per square foot increased in the first quarter, with the supply of buildings offered for sale remaining limited. The lack of supply and a slow rise in interest rates have caused buyers to make decisions quickly, according to Lee. Good industrial buildings for sale in all size ranges don’t stay on the market long and often receive multiple offers. As a result, companies looking to buy now and avoid paying higher interest rates are jumping in and making offers on buildings that might not exactly fit their needs.
The report also found that asking GRS and NNN rates remained unchanged over the previous quarter. Many companies looking to relocate or expand are experiencing “sticker shock” and are deciding to negotiate lease renewals in their current facilities rather than pay a 25 percent increase to move or expand.