The second quarter of 2018 posted strong industrial activity and gross absorption in the Inland Empire, according to a report from Lee & Associates Riverside. In the second quarter of 2018, the Inland Empire experienced continued tightening in the industrial market, with lease rates and prices continuing to climb.
The report says industrial tenants and buyers are finding it increasingly difficult to find quality building options to expand or move in nearly every IE submarket, and although new developments continue to creep into the market, they cannot outpace demand. In most cases, new buildings are being listed at never-before-seen high prices that are accepted by desperate users or investors searching to park 1031 down-leg funds.
Likewise, IE land prices are sky-high, and developers are thinking twice about acquiring new land and coming out of the ground on projects with a long-time horizon, fearing a market correction in the not-to-distant future, Lee says. Nonetheless, owner-users continue to push demand, and there seems to be no end in sight for the current growth curve.
Absorption in this market is expected to remain steady throughout 2018, and is currently on track to outpace the previous year. Second-quarter 2018’s absorption figures were 6.83 million square feet, compared to 3.95 million square feet during the same period last year. IE’s gross absorption for 2017 totaled 16.9 million square feet, continuing on the heels of the great absorption performances in 2016 of 19.3 million square feet and 2015 of 15.3 million square feet.
Gross activity in the second quarter was 9.9 million square feet, with investment purchases and lease renewals accounting for 31.1 percent of the total.
IE industrial vacancy rates decreased in the second quarter to 5.09 percent, the report says. The remainder of 2018 is projected to show an overall stable vacancy rate, although it may rise slightly 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.
Lee reports that the IE industrial base for the second quarter represented 17.3 million square feet under construction, with 89.9 percent of the total in the 200,000-plus-square-foot range, a 5.14 percent increase over the previous quarter. There were 14 buildings that completed construction in the East Valley in the second quarter, with 26 new buildings projected to be completed in the third quarter of 2018. Development of new industrial buildings will continue on projects already in the pipeline over the next year; however, after that, new development is projected to slow down.
Average asking and actual sales prices per square foot increased in the second quarter, with the supply of buildings offered for sale remaining limited, Lee reports. The lack of supply and a slow rise in interest rates have caused buyers to make decisions quickly.
In addition, asking NNN rates increased over the previous quarter in the region, while asking GRS rates remained stable, and Lee predicts that rental rates will remain stable throughout the remainder of the year as they will be pushed by tenants looking for a more affordable option than leasing in neighboring Los Angeles, Orange County, or West Valley markets; however, they will be kept in check due to the increase in new construction deliveries projected.