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7/10/23
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This report provided by real estate services firm NAI Capital Commercial
MARKET OVERVIEW
The Inland Empire's industrial market is undergoing a shift as it moves away from the previously high demand for warehouse and distribution space. This shift has resulted in an increasing amount of vacant excess space entering the market for sublease. The market has experienced a surge in the rate of sublease space being marketed, witnessing an 86% increase compared to the previous quarter and a significant 279% increase compared to a year ago. As of midyear 2023, the total vacant sublease space amounts to 4.1 msf, which is 2.5 times higher than the level observed during the Great Recession in Q2 2009.
Leasing volume year to date has declined by 12.7% compared to the previous year, totaling 15.7 msf. While 25.3 msf have been added to the industrial market over the past five quarters, completed construction on a quarterly basis has experienced a significant drop of 75.4%. This has resulted in a year-to-date decline of 4.3% compared to Q2 2022. Additionally, as the demand undergoes a change in pace, the vacancy rate has risen by 2.5 percentage points from a year ago, reaching 3.7%. This represents a 90 basis point increase quarter over quarter.
Rising rents have been the primary driving force behind new construction. The average asking rent has reached a new high of $1.31 per square foot triple net, marking a 4.8% increase from the previous quarter and a substantial 63.8% increase from the second quarter of 2022. Since the depths of the pandemic shutdown in Q2 2020, the average rent has climbed by 87.1%. However, development has begun to change as industrial space under construction shows only a 1% increase compared to the previous quarter, while experiencing a year-over-year decline of 10.4%
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TRENDS TO WATCH
Companies that expanded their warehouse/distribution space during the pandemic to meet the surge in e-commerce have continued to reduce excess space. In Q2, the industrial market reached an all-time high in the amount of available space for sublease, indicating that companies exceeded their space requirements. This has resulted in an oversupply of space coming on the market. During the second quarter, approximately 1.9 msf of additional vacant sublease space was listed, representing the largest quarter-over-quarter increase on record. Additionally, 4.1 msf of vacant space was added to the market directly, including 2 msf of completed construction.
Despite lower economic growth on the horizon, the industrial market has shown resilience. However, companies are eager to dispose of unwanted space. The increase in available industrial space provides more options for tenants, but high prices and rising interest rates are expected to weaken sales of industrial buildings. Sales volume has declined by 19.4% quarter over quarter and is down 37% from a year ago, amounting to approximately $1.6 bil year to date. The median sale price per square foot stands at $261, reflecting an 11.3% increase quarter over quarter but a 2.1% decrease year over year. The combination of increasing interest rates, a slowing economy, and weakening demand is likely to have a dampening effect on pricing heading into the second half of the year.
This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital Commercial
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