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2018 Q3 Inland Empire Industrial Knowledge Report

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Vacancy Falls To Lowest Recorded Rate

The Inland Empire market remains the most sought-after warehouse/distribution market in the United States with the lowest vacancy rate and highest rental rate of comparable major distribution hubs. With such favorable conditions, developers invested heavily in new speculative construction activity. In the past 12 months, a total of 24.3 million square feet of new supply was added to the base. During this time, the vacancy rate reached historic lows as nearly all new supply was absorbed by large tenants seeking modern distribution centers.

The vacancy rate fell an astounding 70 basis points to 3.1% as gains in demand have outpaced gains in supply this quarter. Available industrial space remains incredibly scarce across all size segments. This is especially true in the West Inland Empire which has an availability rate of only 3.4%. Industrial net absorption registered 4,625,100 square feet for the quarter, the 36th consecutive quarter of growing industrial demand. Sales and leasing activity totaled 9,766,200 square feet this quarter. This was broken out into 19 sales (1,915,800 square feet) and 87 leases (7,850,400 square feet). Industrial demand continues to be drawn from fast growing e-commerce tenants. Landlords for these larger companies are seeing increased need for tenant improvements, as well as longer free rent periods to make the necessary improvements. In exchange, they are getting longer lease terms at higher rates to compensate.

Construction completions were 2,161,700 square feet this quarter, roughly half the average of a more typical quarter. Limited completions this quarter have led to ongoing construction totaling 24,989,600 square feet. Of this amount, roughly 10 million square feet is scheduled to be delivered in the next quarter. This quarter, ProLogis completed its acquisition of DCT Industrial in an 8.4 billion dollar stock-for-stock transaction that includes 22 properties located in the Inland Empire. Rising sales prices led to further compression of cap rates to 4.6%. No other property type has seen such continued compression in cap rates, especially at a time when 10 year treasury rates have increased by 70 bps over the past year.

Key Takeaways:

  • The vacancy rate fell 70 basis points to 3.1% which is the lowest historical rate ever recorded for the Inland Empire. 
  • This fall in the vacancy rate was partly a result of less than normal construction completions which have only totaled 2,161,700 square feet this quarter. Much of this construction square footage is pre-leased. Construction completions have averaged roughly 4 million square feet per quarter since the construction boom that began in 2012.Low quarterly completions coupled with new construction starts have pushed under construction space to 24,989,600 square feet.
  • Limited new construction completions and a lack of available space for larger spaces has hindered absorption potential which totaled only 4,625,100 square feet this quarter.


Much-needed construction will be brought to the market in future quarters. This new supply is likely to be quickly absorbed by growing companies pushed out of neighboring infill markets. Threats of an ongoing trade war, slowing economic conditions and ongoing labor disputes remain background noise to a market seeing record low vacancy rates and record high asking rates, for now. Demand remains strong for larger e-commerce companies. Online retail has grown from 3.5% of all retail sales in 2007 to 9.6% currently. The pace of this growth has not slowed and will continue for the foreseeable future as consumer preferences continue to evolve. As internet retail continues to grow, so too will the need for supporting industrial space.

Low construction completions this quarter will lead to greater construction next quarter with a potential 10 million square feet finishing construction. A quarter of this space is pre-leased and the remainder should not remain vacant for long when brought to market. We may see a 50 basis point increase in vacancy rates in Q4 if all projects are delivered as expected. Net absorption was limited this quarter due to fewer than average construction completions. Next quarter may see the completion of roughly 10 million square feet which is roughly 25% pre-leased. If demands remains robust, next quarter may see a new record in positive net absorption. Average asking rates rose $0.02 PSF NNN to end at $0.61 PSF NNN, the current high water mark for rental rates in this region. Low vacancy rates and increased industrial demand puts continued upward pressure on rates. Rents are at an all-time high. This is due to rising market conditions for new buildings with state-of-the-art features, which is reflected in the rental rate. These newer buildings allow tenants to be more efficient by lowering operating costs and increasing the velocity at which goods can be sorted and shipped.

Planned and entitled projects total over 50 million square feet in the Inland Empire controlled by a limited number of major developers. We should see a controlled flow of new projects breaking ground in upcoming quarters as these institutional developers seek to limit and control their exposure to risk. Investors remain attracted to the industrial sector due to continued shifts in consumer behavior and a growing economy. The Inland Empire remains the premier industrial investment market due to low vacancy rates and continued rising rental rates.




Q3 2018 Greater Los Angeles Inland Empire Industrial Market Report

2018 Q3 Inland Empire Industrial Knowledge Report

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