Large Deals Surge as Inland Empire Industrial Vacancy Nears 6%

A softening market in Southern California’s Inland Empire is producing a bevy of large leasing deals.

The vacancy rate in the two-county market, which stretches from the city limits of Los Angeles to the Arizona border, hit 5.9% in the first quarter-the seventh consecutive quarter of increased vacancy in Inland Empire, which in the middle of 2022 had a vacancy rate that was too low to measure.

Net absorption finally gave way to an onslaught of new supply, turning sharply negative with absorption totaling minus 964K SF in Inland Empire in Q1 2024—a swing of more than 1M SF from positive absorption totaling 1.67M SF in Q4 2023—while sublease space increased to 18.5M, with more than 80% of sublease availability located in warehouses larger than 250K SF, according to a new market report from CBRE.

“Vacancy increased due to 3.8M SF of new construction delivering vacant and available spaces’ time on market growing, leading to spaces being vacated by occupiers without a new tenant replacing them,” the report said.

The overall net absorption-Q1 2024 was only the third time there’s been a quarter of negative absorption in Inland Empire in the past 15 years-was dragged down in the nearly fully developed IE East, where 3M SF went vacant, while some large new leasing deals lifted IE West to 2M SF of positive net absorption.

Five lease deals of 1M SF or more were signed in Inland Empire in Q1, which is close to the 2023 total of seven mega-deals. Four of the five mega-deals in Q1 were new leases. The increase in mega-leasing was facilitated by increased availability through new development and recent move-outs, the report said.

Lease rates dropped by 8%, quarter-over-quarter, to $1.36 NNN per SF per month from $1.49 per SF.

“The 8% decrease in rents in Q1 2024 began the realignment of the Inland Empire as an affordable market when compared to others in Southern California,” CBRE said.

Despite the softening of the rental market, the pace of new construction actually increased a tick in Inland Empire, with the total of 20.4M SF of warehouse space under construction at the end of the first quarter a 200K SF increase over the total at the end of 2023. As 4.8M SF was delivered in Q1 in Inland Empire, 4.8M SF of new projects broke ground.

For most U.S. markets, a pipeline of more than 20M SF would be considered humongous, but for Inland Empire it actually is a sign that supply and demand are beginning to balance out: Q4 2023 marked the first time since the middle of 2021 that new construction dipped below 21M.

“The dwindling development pipeline will likely not satiate future demand, especially in the 500K SF and above size range. If demand increases as expected in the second half of 2024, the lack of new development will drive down vacancy and supply,” CBRE’s Q1 report said.