Colliers' Industrial Third Quarter Market Overview
Logistics Companies, E-Retailers Broaden Appetites for Space in Inland Empire, Vacancies Drop and New Construction Soared
Pushed by the growth of logistics companies and E-retailers and their ever- increasing appetites for large distribution and warehousing centers, demand for industrial buildings in the Inland Empire during the third quarter of 2014 continued to soar with sales and leasing activity remaining strong, new construction reaching record highs and vacancy rates reflecting the addition of new speculative construction, according to a recent report from Colliers International.
In the third quarter of 2014, sales and leasing activity totaled 7.6 million square feet spread among 80 leases for 6.6 million square feet and 23 sales for 980,100 square feet, the report noted. Year-to-date sales and leasing activity was 25.2 million square feet, which mirrors the activity seen a year ago during the first three quarters of 2013.
“What this demonstrates is that there is continuing demand for the newer, more efficient buildings and we are starting to see smaller-sized developments under 300,000 square feet in the region,” said Colliers Executive Managing Director John Hollingsworth. “But the market fundamentals continue to be sound.”
. Overall vacancy rates during the third quarter declined to 4.9 percent from the 5.1 percent recorded during the third quarter of 2013, pushed downward by the region’s soaring demand for large warehouse and distribution buildings.
“This is the last submarket within the Greater Los Angeles Region that still has raw land available for development of large industrial buildings,” said Hollingsworth. “The rest of the L.A. basin industrial base is, or soon will be, built-out and developers are finding land extremely scarce in the more urbanized areas of the basin. Despite this, there is still strong demand for urban in-fill properties due to their proximity to the ports of Los Angeles and Long Beach. Clients will continue to pay a premium for space near the ports – if they can find any.”
In the third quarter 2014 there were 11 buildings greater than 500,000 square feet under construction or completed, with 60 percent pre-leased based on square footage, the report noted.
“There has been a long pent-up demand for the larger, newer and more efficient buildings in the 500,000-square-foot and above range,” he added. “As the economy has strengthened, developers who sat out the recession and who are capable of building these larger, more efficient structures have begun to do so in earnest this year.”
Hollingsworth added, “Despite all of this new construction, we expect demand to quickly absorb most of that new space, creating a challenging, competitive market for tenants seeking new space. We anticipate that the year-end absorption will be strong with another five to six transactions completed in buildings over 500,000 square and that there will be continuing strong demand for developable land across the Los Angele/San Bernardino basin.”
To illustrate that point, Hollingsworth noted that 10 new projects finished completion during the third quarter totaling 4.3 million square feet, with 1.3 million square feet of that amount leased prior to completion. Overall, there remain 11.9 million square feet of industrial space under construction, of which 3.6 million square feet is already leased.
“This is a positive sign for this market in particular and for the region overall,” said Hollingsworth. “It shows developers are gaining a level of confidence in the market not seen since the recession, which will help others come into the market on both the tenant and development side.”
Vacancy remains fairly tight for buildings over 500,000 square feet with a current rate of just 5.3%. While this size segment comprises less than one-third of the base for the Inland Empire, it accounted for some 90 percent of the net absorption recorded in the third quarter, Colliers reported.
“It is the size segment that is most sought after by large, multinational tenants with logistics, warehousing and, in some cases, manufacturing needs,” said Hollingsworth. “Builders, who at first balked at building such large facilities without a tenant in hand, are now more willing to build first because they know the demand is there for the taking.”
According to Colliers, there remains 9.3 million square feet of this “big box” product under construction in 11 projects, of which four are pre-leased, underscoring Hollingsworth’s assertion on speculative development. The vacancy rate also remains tight for buildings under 100,000 square feet at a staggeringly low 2.8% in the East Inland Empire and 2.2% in the West Inland Empire.
“These smaller buildings are the ones that tend to get overlooked when tenants and developers are discussing the Inland Empire market,” said Colliers Senior Vice President Richard Schwartz, who specializes in these markets. “There are a number of opportunities that tenants in this size range may be missing if they do not look here.”
According to the Colliers’ report, during the fourth quarter of 2014, the brokerage company is anticipating that 3.1 million square feet of new construction completions will take place with 60 percent of this newly completed space pre-leased. Average asking rental rates in the Inland Empire have remained flat year-over-year at 42 cents per square foot on a triple-net basis, Colliers reported, but cautioned that asking rental rates can be an inaccurate indicator of a market’s actual rental rate capacity.
“That’s why a significant portion of the larger projects that are being brought to market have undisclosed asking lease rates, making it more difficult for us to determine accurate asking rental rate information,” said Schwartz. “With 11 projects over 500,000 square feet currently on the market and another building of that size scheduled to come on the market in the fourth quarter, none of which have listed asking prices, it is often very difficult to determine with any accuracy an average asking rental rate for the smaller buildings in other parts of the Inland Empire. However, that really doesn’t matter when you factor in these large buildings since they can skew the numbers greatly.”
According to the report, the market recorded positive net absorption of 3,028,400 square feet in the third quarter, the 20th consecutive quarter of positive net absorption for the Inland Empire. Year-to-date net absorption stood at 9.9 million square feet at the end of the third quarter.
“It’s well known throughout the brokerage business that most of that positive absorption during the third quarter was composed almost entirely of the 1.2 million square feet that Amazon took down for its distribution center in Moreno Valley,” said Schwartz. “With that kind of size and clout, one deal can have an immense impact on the market.”
Colliers reported that Amazon also took 700,000 square feet in Redlands for its larger item fulfillment center, creating more than 1,000 new jobs with it and with its Moreno Valley facility. According to Colliers, the unemployment rate for the Inland Empire was 8.7 percent as of August 2014, and experienced job growth of 2.7% over the last 12 months. Trade, transportation and utilities continued to outperform other sectors, adding 7,600 jobs, while construction employment increased by 3,000 jobs over the same time period.
“With its low vacancy rates, declining unemployment rate and rising levels of construction, the Inland Empire seems poised to continue its growth levels through the next two years, at least,” said Hollingsworth. “As companies find an absolute lack of industrial product in closer-in locations, like the Mid-Cities Submarket of Los Angeles County, they will continue to look east to the Inland Empire, especially for the largest facilities. There just isn’t anywhere else that land is available for such large facilities.”