Inland Empire Industrial Absorption Goes Negative

Supply finally is exceeding demand in the nation’s hottest industrial market in a big way: net absorption in the Inland Empire registered a shift of nearly 6M SF in the second quarter from the positive side of the ledger to the negative.

Net absorption dropped to negative 2.3M SF in Q2 2023 in the Inland Empire from a first quarter level of 3.5M SF, according to a new report from Kidder Mathews. According to the firm, this is the first negative quarterly absorption total for Inland Empire in more than 10 years.

A confluence of decreasing demand, higher delivery costs and interruptions at West Coast ports appears to have taken the steam out of the market that encompasses Riverside and San Bernardino counties in Southern California, stretching from the Los Angeles city limits to the Arizona border.

The vacancy rate in Inland Empire, which was less than 1% a year ago at this time, rose to 2.9% in the second quarter, with the availability rate jumping to 9% in Q2 from the Q1 level of 7.9% in Q1. In Q2 2022, the availability rate stood at 4.6%.

Leasing activity dropped to 8.3M SF in Q2 from a first-quarter level of 9.3M SF, while asking lease rates ticked down to $1.41. Sales volume remained strong, growing to 3.9M SF from the Q1 total of 3M SF.

In perhaps the most ominous sign of the shape of things to come, the Inland Empire submarket with the largest amount of existing inventory—Ontario, which has an estimated 117M SF of industrial space—registered the poorest net absorption in Inland Empire in Q2, a total of minus 1.4M SF.

In June, a labor contract dispute at West Coast ports resulted in container backlogs and prolonged wait times, causing more shippers to re-route and offload at East Coast ports, a trend that began last year.

The spread between growing supply and diminishing demand is likely to keep expanding for the rest of the year. New mega-warehouses continue to be delivered at a rapid clip in Inland Empire: 30M SF was delivered in 2022, more than 10M SF of new supply has come on line this year and the pipeline is full of projects.

Throughout 2022, most of the new deliveries were arriving pre-leased in the Inland Empire market, but the projects in the pipeline now are pre-leasing at a slower rate, according to Kidder Mathews.

“Through 2023, the Inland Empire industrial market is expected to experience an increase in vacant property as released construction projects come to completion. There will then be a period of decline as the new supply is absorbed and the pace of development comes to typical levels,” the Kidder Mathews outlook said.

“Supply growth will generate further upward pressure on vacancy at least through the end of the year, as the under-construction inventory is pre-leasing at a slower rate,” the report said.