INLAND EMPIRE, CA-The Inland Empire industrial market continued to witness a sustainable recovery in 2012 from the depths of the recession in late 2009, and business growth has emerged as a key driver of that recovery. Initially the Inland Empire's recovery was based predominantly on absorption required by consolidation and cost reduction efforts. Today however, as the economy continues to stabilize, business owners are becoming increasingly comfortable with business plans that include expansion and acquisition, and many industrial users are implementing those plans while interest rates are low and before vacancy rates become so low that rental rates spike significantly higher.
The Inland continues to be a low cost alternative to more gentrified markets such as Los Angeles and Orange County, and offers a strong option for industrial users seeking an opportunity to expand, while at the same time lowering costs into product that is state-of-the-art.
- Speculative Big-Box Development Brings New Class A Product and Class A Tenants
Demand for for-lease industrial space is high in the Inland Empire, especially in the 500,000 square-foot plus size range. There has been a lack of supply in this size range for some time, which spurred speculative development of class-A industrial product. As such, five million square feet of new construction was delivered in 2012, and another eight million square feet is currently under development and planned for completion in 2013.
Despite these new deliveries, competition is high which has led to competitive bidding, which will continue to put upward pressure on rental rates.
- Consolidation and Expansion Trend Continues
Over the last year, there has been an increase in industrial consolidation in the Inland Empire, especially in the big box sector. Many companies which were originally operating in three to four buildings are now identifying opportunities to move into a single industrial property. For example, Distribution Alternatives recently consolidated multiple warehouses throughout the Inland Empire into one planned 650,000 square-foot industrial property in Fontana.
Ecommerce companies have been especially active in recent expansions (a new trend given the recent change in California tax laws), including Amazon, which recently leased a planned 1million square-foot warehouse in San Bernardino (with a second 1 million square-foot facility in negotiations); Haute Look, a division of Nordstrom which leased 605,000 square feet in San Bernardino, and HayNeedle which leased 300,000 square feet in Riverside.
Further evidence of recovery can be seen in existing companies currently located in the Inland Empire who are renewing leases and asking for additional space in either the same building or by taking a second building nearby. For example, Voit recently directed a new lease on behalf of the owner of an industrial facility in Rancho Cucamonga. The lessee, Hankook Tire, will occupy roughly 400,000 square feet of the building, allowing Hankook to increase its footprint in the market. Hankook was occupying an adjacent industrial property and recognized the opportunity to expand when the building next door became available. Voit also negotiated an expansion for IFCO Systems, doubling its footprint in Rancho Cucamonga late last year.
Lastly, the tried and true trend of corporate relocations from other parts of Los Angeles to the Inland Empire has returned again, post-recession. For many of these firms, these recent moves are the first foray into the Inland Empire, including Hill's Pet Nutrition and Lollicup USA, both of which moved into the Inland Empire industrial market within the past six months from facilities located in Los Angeles.
- Class B Space Provides A Cost-Effective Option
Another opportunity for industrial users in the Inland Empire lies in class B product. While this may seem like a less attractive option, the truth is that many of the class B buildings are really class A buildings in other markets and the only factor that limits them from becoming class A in the Inland Empire is their year of construction which would impact ceiling height and sprinkler density. To the user who is not in need of state-of-the-art, the savings benefit offered by much of the class B product can approach rental rates that are currently 10% to 15% less than class-A rates. This dynamic applies across all size ranges.
Overall, the future of the Inland Empire industrial market continues to appear bright. Industrial tenants and landlords alike will benefit from new construction, and the return of speculative development should satisfy the consolidation trend that has fueled the growth in the Inland Empire for the last quarter of a century.
Juan Gutierrez is a senior associate in Voit Real Estate Services' Inland Empire office. You can contact him at [email protected]. The views expressed in this column are the author's own.
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