Glut of Warehouses Arrive as Vacancy Rises in Inland Empire

The industrial market in Southern California’s Inland Empire, which in the middle of 2022 had a vacancy rate that was too low to measure, continued to normalize in the fourth quarter of 2023, as the vacancy rate grew to 5.2%, the sixth consecutive quarter of increased vacancy.

For the first time since the middle of 2021, construction of new Inland Empire warehouses dipped below 21M SF in Q4, while deliveries surged to more than 15M SF, nearly half of the 33M SF of new supply that arrived in 2023 across the market, according to a new market report from CBRE.

Pre-leased buildings delivered across Inland Empire added 9.3M SF of positive net absorption in the fourth quarter, enabling overall net absorption in the market to remain positive at 1.67M SF.

Positive absorption was achieved despite the delivery of 5.8M SF of vacant space and 3.1M SF that was vacated in Q4 and offered for sublease as occupiers who leased extra space during the pandemic gave it back, CBRE said.

In the more densely developed Inland Empire West, the warehouse hub in the Ontario submarket experienced negative net absorption of nearly 1.9M SF in Q4, but this was offset by about 1.7M SF of positive absorption in Rancho Cucamonga.

The IE West notched overall positive absorption of 1.26M SF, while Inland Empire East saw 404K SF of positive absorption in the fourth quarter, with most of it coming from I-10 Logistics Center building deliveries in Cherry Valley.

Availability increased by 140 bps to 8.1% in the fourth quarters across Inland Empire, which stretches across Riverside and San Bernardino counties from the Los Angeles city limits to the Arizona border.

Lease rates fell slightly quarter-over-quarter to $1.49 NNN per SF per month in Q4 2023 from $1.50 per SF in Q3 2023 as landlords opted to negotiate rates and abatements to secure tenants in place. Lease rates are almost unchanged from the $1.47 NNN per SF per month in Q4 2022, CBRE reported.

New warehouse starts are falling behind deliveries as difficulties securing construction financing and local NIMBY opposition to new projects has grown. Only about 12M SF of new warehouse projects broke ground in Inland Empire in the fourth quarter.

“The combination of continued economic momentum with a likelihood that the Fed’s dramatic tightening cycle is now complete makes a ‘soft landing’ appear more likely for early 2024 but the pace of growth will be more modest than in recent quarters,” CBRE’s outlook projected.

“Despite the economic uncertainty moving into 2024, the fundamentals of the Inland Empire industrial market remain strong,” the report said, noting that port activity in Southern California is “showing signs that 2024 will see considerable growth.”