Industrial rents might be plateauing in the Inland Empire. According to recent research from NAI Capital, industrial rents in the Inland Empire region increased $0.01 in the first quarter compared to the fourth quarter 2018. Despite the near flat quarter-over-quarter activity, industrial rents in the first quarter were up more than 18% year-over-year, illustrating strong demand. Rents are flattening out for class-b and vintage product in the market.
“A class-A building over 100,000 square feet is typically going to feature 36-foot clear heights, ESFR, 135 to 180-foot truck courts and built in the last five years. User demand for those buildings is only increasing,” Nicholas Chang, SVP at NAI Capital, tells GlobeSt.com. “For a class-B asset that is vintage construction or is in a size class where there is not a lot of aggregation of space among corporate users, rents are stalling or in some cases they are falling. We saw this in the last economic cycle where there becomes a flight to quality.”
While rents are flattening for older or lower-quality product, rents are continuing to increase for new construction. This is good news. There is currently more than 27 million square feet of class-A industrial product under construction, with individual boxes ranging in size from 7,000 square feet to 1.2 million square feet. “There is no concern about the space being absorbed because there is still strong demand for new class-A product,” says Chang.
With such strong demand for new, quality industrial space, Chang expects that the construction pipeline will continue to grow even as rents for lower quality product stall. “Land prices are increasing, and every week or every month there are record-setting prices. Developers are really attacking raw land, especially in the Inland Empire West,” he says. “To me, that is a reflection of the developer or capital market demand for new product but the user demand as well. Everything comes down to what the user is looking for. Because of the ecommerce phenomenon, corporate America is aggregating into larger and larger space, and user demand requires better class-A product.”
Stepping back to take a broader perspective of the market, industrial fundamentals and demand are strong in the Inland Empire, and for developers looking to increase their exposure to the industrial market, the Inland Empire will continue to be a target market. “Rental rates will continue to climb, and I think the fundamentals will remain strong,” says Chang. “For example, there has been disciplined lending over the last 10 years, so you don't have overleveraged debt on real estate. Interest rates are also still stable. Corporate users are continuing their evolution into an ecommerce model, and that is not slowing down.”
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Kelsi Maree Borland
