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4/15/20
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This quarterly update was provided to us by real estate services firm Kidder Mathews
The Inland Empire industrial market did not show any slowing as market fundamentals held steady in the first quarter, despite effects of Covid-19 across the nation. Tenant movement across the metro reported positive once again as Inland Empire remains one of the most sought-after industrial markets in the country. In addition, steady demand contributed to the rise of ecommerce and 3PL company expansions throughout the market have continued to push rental rates above post-recession highs. Although stay-at-home orders have been placed in the area, there have been no major indications of a slow-down in development, as long as companies are abiding by proper social-distancing guidelines. Over 5.2 msf was completed in the first quarter with an additional 20.7 msf under construction. Big box warehouses (250k sf and above) account for more than 64% of the construction pipeline, as companies continue to expand their warehouse footprint and perfect their logistics channels. With demand fundamentals holding firm, we anticipate the Inland Empire industrial market to remain stable in 2020.
Market Summary
Despite the steady inflow of new supply entering the market, direct vacancies have not experienced any major increases. In fact, vacancies fell 20 basis points (bps) from a quarter prior to conclude at 4%. Direct vacancy levels in IE West continue to be the lowest, concluding the quarter at 2.2%. Conversely, IE East reported direct vacancies levels at 6.2% as an abundance of land and new developments continue to enter the market. Spaces below 50k sf remain constricted as vacancy levels have not surpassed 3% since 1Q15. Expect some upward pressure on vacancies to occur within this size range as over 1.2 msf is currently under construction. Net absorption, a measure of market strength, ended the quarter on a high note with 6.12 msf of direct positive absorption. A major contributor to the positive absorption levels was when the Kimberly-Clark Corporation moved into their newly developed 1.18 msf facility at the Ontario Logistics Center. Just recently, the second building within the industrial park was pre-leased to an undisclosed tenant totaling 1.25 msf and will look to move in once completed. Anticipate demand fundamentals to remain robust for major occupiers as they continue to expand their warehouse/distribution channels throughout the area.
Leasing activity experienced a cooling of in the first quarter with 228 transactions and a total volume of 8.19 msf. This is down nearly 38% from a year prior when the market reported 313 transactions and a deal volume of over 13.1 msf. This decrease in leasing activity can be directly correlated to the spread of Covid-19 and the current stay-at-home order in place. On the other hand, this has not affected rental rates as direct rental rates continued to record post-recession highs, concluding 1Q20 at $0.73 per square foot on a triple net basis. Additionally, leasing activity and expansion efforts have been put on pause as many companies have requested to wait 30, 60, and 90 days before making any real estate decisions. Although leasing activities have slowed down, demand from companies with ecommerce capabilities will significantly increase this year. With ecommerce sales expected to spike in 2020 due to the pandemic, companies will look to expand their industrial footprint as inventory levels begin to increase to cater the recent surge in demand.
Like the trends across the LA Basin, the Inland Empire Industrial investment market started off strong. At the end of 1Q20, over 2.5 msf traded hands equating to over $6.4 mil in deal volume. Currently, buildings are trading at $140.38 per square foot with cap rates settling at 5.5%. Given the current circumstances, most lenders have now become more conservative on their lending practices. In addition, CMBS lenders have put a pause on lending until further notice. As it is with leasing activity, many sellers and buyers across the market have halted discussions as to better assess the market at a later time. At the current moment, the sales activity of sellers in the market have mainly been private investors, accounting for over 41%. Conversely, REITs have been the main buyers in the Inland Empire accounting for 63.9% of acquisition activity.
A Look Ahead
As it is too early to analyze the long-term impact of the Covid-19 pandemic across the nation, we can only anticipate that ecommerce and 3PL firms will continue to be the driving force throughout the market. Over the years, ecommerce as a percentage of retail sales have increased +/- 15% year-over-year. We expect this to increase significantly as nation-wide stay-at-home orders have pushed many Americans towards online shopping. The immediate surge of retail goods ordered online will also propel the demand from 3PL related firms as they look to perfect logistics. Furthermore, an increase in reverse logistics may also take place with almost 30% of online purchases expected to be returned. This accounts to over $550 billion worth of returns annually. This will require firms with reverse logistic capabilities to expand their footprint as they require as much as 20% more space than a standard logistics chain. Overall, expect the Inland Empire industrial market to remain stable moving forward.
Notable 2020 Industrial Leases
XPO Logistics 4413 Patterson Ave, Perris 912.3k sf
Sams Club 22722 Harley Knox Blvd, Riverside 753.2k sf
Undisclosed 3388 S. Cactus Ave, Bloomington (Pre-leased) 615.3k sf
Notable 2020 Sales Transactions
TA Realty 6275 Lance Dr, Riverside 1.01 msf - $129 mil ($127/sf)
CBRE Global Investors Ltd 945 S. Sunnyside Ave, San Bernardino 143.3k sf - $31.5 mil ($219/sf)
LTS Inc 10628 Central Ave, Montclair 98.2k sf - $18 mil ($183/sf)
2020 Market Highlights
Direct Vacancy rates concluded the quarter at 4.0%
Rental rates remain to post record-highs, concluding the quarter at $0.73/sf on a triple net basis
Avg. Sales Price for 2019 was 140/sf with cap rates at 5.5%
20.7 msf of industrial space is currently under construction
Sources: CoStar, GlobeSt, RCA, Optoro, Supplychain.toolbox.com. For more information contact: John Cha, Director of Research, 206.248.7300
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