Inland Empire Industrial Vacancy Rises, Rents Drop

Market conditions finally have begun to shift in what has been the nation’s hottest industrial market for the past year: vacancy rates ticked up and rents ticked down in Southern California’s Inland Empire in the first quarter.

The overall industrial vacancy rate in Inland Empire—which last year was as low as a microscopic 0.4%—increased 60 bps to 2.8% in Q1 2023, according to a new market report from Savills.

No, we don’t expect to roll out any “boom to bust” headlines soon regarding the sprawling Inland Empire market—now home to more than 570M SF of warehouses—that encompasses Riverside and San Bernardino counties from the Los Angeles city limits to the Arizona border. The 2.8% industrial vacancy rate in Inland Empire remains one of the lowest in the US.

However, an economy that appears to be heading into a recession and a steep drop in the volume of cargo shipments to the Los Angeles ports are putting a measurable dent in SoCal’s industrial mega-market.

Asking rental rates in Inland Empire decreased in Q1 by 2.4% to $1.44 NNN. Savills said it expects rental rates to plateau and then start to decline “as economic challenges arise.”

“As the expectation of a recession has become more apparent, market conditions are starting shift due to economic uncertainties. The Port of Los Angeles saw a year-over-year 43% decrease in container volume,” Savills’ report said.

If the Inland Empire industrial market is cooling off, it still has a lot of stream to dissipate: despite the delivery of nearly 30M SF of new warehouse space over the past year—including 9.9M SF in Q1 2023—overall net absorption totaled 4.9 M SF in the first quarter.

Leasing activity in the Inland Empire West submarket featured two deals each encompassing more than 1M SF: Constellation Brands signed a 1.4M SF deal in Jurupa Valley and Francisco Street LP signed a 1.1M deal in Fontana.

The largest lease deal in the Inland Empire East submarket saw NFI inking an 864K SF lease in Perris and Nordstrom renewing a 606K SF warehouse in San Bernardino.

With the western half of the Inland Empire nearly filled to capacity and sites for developing large warehouses disappearing, there’s a hotbed of new activity in the East submarket—the East leads the overall Inland Empire market with 5.6M SF of net absorption due to large tenant move-ins, which included Target, Spotify and Shein, Savills reported.

Regardless of the impact of a slowdown, future absorption is expected to remain positive in the Inland Empire due to anticipated deliveries and expected large tenant move-ins, including Amazon scheduled occupation of a 4.4M SF mega-warehouse in Ontario.

Preleasing of facilities under development in the Inland Empire has been so strong that the additional 25M SF in new warehouse space scheduled to be delivered during the rest of 2023 is not expected to impinge on positive absorption.