How Fast Will Inland Empire Retail Rents Keep Growing?

The Inland Empire retail market has enjoyed the most robust rent growth in Southern California. An earlier report from NAI Capital shows that retail rents grew 13% year-over-year in 2018 in the Inland Empire, compared to only 1.8% in Los Angeles and .5% in Orange County. Strong population growth will be behind the strong market performance, but will it hold through 2019 and continue to drive rents at this pace? Lidia Talavera of NAI Capital says rates will see modest growth this year as the market begins to bifurcate.

“We expect Inland Empire retail rates to continue to increase modestly in 2019,” Talavera, an EVP at the firm, tells GlobeSt.com. “Most of the demand is for smaller shop spaces between 1,000 square feet to 2,000 square feet and restaurant-ready space; those are the spaces where we will continue to see an increase in rents. Spaces between 3,000 to 7,000 square feet will continue to be challenged by the lack of interest from tenants.”

As is true throughout the country, retail rent growth will be strongest for grocery-anchored retail centers. These retail assets will see the most benefit from the population growth as well as a limited supply. “We expect to continue to see a steady rate of increase primarily in grocery-anchored centers,” says Talavera. “The lack of new development of this type of product has pushed some rental rates closer to pre-recession rates. In addition, well-located big-box retail space will experience steady demand helping to sustain rent increases commensurate with competition from tenants looking for space in dense population centers.”

The 3,000 to 7,000-square-foot size range, however, will see the poorest rent growth as downsizing retailers continue to exit this space. “Since the recession, we saw the majority of tenants simplifying their business models and downsizing, vacating space in the 3,000 to 7,000 square-foot size range. That size range has been less attractive to most mom and pop and regional tenants,” adds Talavera.

While rent growth may be more modest this year, rents will continue to outpace other Southern California markets—and that will in turn attract investment capital and encourage owners to bring properties to market. “The increase of rental rates will continue to favor the sale of retail property and capital investment in the Inland Empire,” says Talavera. “The Inland Empire will continue to offer investors better returns on their investment over Los Angeles and Orange Counties. Price appreciation and cap rates hold a wide gap relative to Los Angeles and Orange County, ranging from 6% to 8% cap rates.”

As long as population growth sustains in the Inland Empire—as it is expected—the retail market will continue to grow. “Strong job and population growth are key factors for investors in the acquisition of retail property and capital investment,” says Talavera. “The unemployment rate is now at a record low and employment is double-digits above its pre-recession peak. Recalling some of the figures I’ve read, personal income has risen 34.7% since the recession and achieved a new high. Homeownership rate reached 60.1% in 2nd quarter of 2018 and continues to increase. This trend is expected to continue as the Inland Empire offers a more affordable lifestyle than those of the neighboring counties, driving investment capital and sale prices in the Inland Empire.”