Inland Empire industrial rents are catching up to Orange County. According to a new report from JLL, the spread between industrial rents in the Inland Empire and in Orange County has narrowed to just $0.10. The spread has narrowed consistently over the last decade, closing sharply in 2018.
"There are several main factors that are driving Inland Empire industrial rents including: tenant demand across a majority of square footage segments is outpacing supply; the increase of construction cost and land basis cost for new development; flight to quality from tenant in-migration from surrounding counties who are unable to find suitable high cube space for better operational efficiencies; growth from Inland Empire companies," Ruben Goodsell, managing director at JLL, tells GlobeSt.com.
The narrow spread between rents in the two market could potentially impact leasing activity. The Inland Empire has been a more affordable market, and has benefitted from a flight to affordability from the coastal markets. "Increased rental rates could impact leasing activity in certain size segments," says Goodsell. "Companies that are more labor and port sensitive may pause and not relocate due to the perceived pricing discount not being as wide as it once was. This may cause the companies to either renew at their current location or find additional 'band-aid' space to minimize cost and disruption in operations."
Inland Empire rents may be catching up to Orange County, but they won't likely catch up to Los Angeles—which is the most expensive market in Southern California. "In terms of class-A industrial space, we do not expect Inland Empire industrial rents to reach Los Angeles industrial rents in this cycle," says Goodsell. "This would be due to lack of relevant available product and high land / entitlement cost basis associated for similar product in which any new product will mostly come from areas requiring redevelopment. Users of high cube product that desire to stay in Los Angeles are predominately very port and labor sensitive and the amount of truck turns in moving high velocity product is paramount therefor the relative pricing per-square-foot premium is not the primary driver for relocation."
However, the growth rate in the Inland Empire is outpacing other Southern California markets. "The Inland Empire industrial market will continue to outpace the surrounding submarkets in the greater Los Angeles region due to its available land supply for new construction and users continued flight to quality," says Goodsell.
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Kelsi Maree Borland
