Inside the Inland Empire’s Growth
What options are left on the table for industrial tenants as vacancy grows tighter and tighter in the Inland Empire?
The Inland Empire, spanning Riverside and San Bernardino counties east of Los Angeles, has been a mainstay of the industrial real estate sector for years. With high rents and limited land near Los Angeles, industrial users have turned their eyes eastward. But in 2022, is this market, too, becoming too expensive for most tenants to consider?
No Vacancy in the Inland Empire
The one key factor driving costs up within the Inland Empire is incredibly low vacancy. A first-quarter report from JLL put the market at a shocking 0.4% — and heading lower. Kidder Mathews’ report pegged vacancy at 1.2% at the end of the quarter. Even the higher of the two figures is incredibly low for any industrial market for as long as data has been available.
So, what does this mean? Well, at its simplest, rising demand with next to zero availability has driven prices up astronomically. Asking rates for direct leases in the Inland Empire hit $1.08 per square foot at the end of March. While this pales in comparison to Los Angeles’ $1.38 per square foot, the gap between the two markets is closing fast. The Inland Empire’s rates jumped 30.1% compared to the first quarter of 2021. And pricing is only set to go higher.
Warehouse complex in Ontario, Calif. Image from Google Maps.
Running Out of Land
It isn’t just increases in demand driving the market to the brink of unaffordability. As demand rises — L.A.'s ports showed an increase of 7.3% in container traffic year-over-year through February — one of the biggest factors at play is land. Or, rather, the dearth of it.
This is particularly problematic in the western part of the Inland Empire. There, few parcels can support the large facilities needed by e-commerce companies. Developers have kept moving ahead, with 32.5 million square feet under construction at the end of the first quarter. Even so, absorption was negative to the tune of 4.4 million square feet, the Kidder Mathews report noted. That's despite the more than 5 million square feet delivered in the first quarter alone.
How Are Industrial Users Coping?
As the remaining space gets pricier, industrial tenants have three options: Stay put, downsize, or move out of the market altogether. Distributors and e-commerce companies with deeper pockets may be willing to pay more to occupy key locations. Others may have little choice but to move elsewhere. As a result, industrial leasing activity has seen an uptick in markets relatively close by.
But where can a tenant move, without sacrificing too much in terms of regional accessibility? As mentioned before, Los Angeles’ rates are even higher than the Inland Empire, and neighboring Orange County has the most expensive rents in Southern California. Many tenants have instead been looking further afield to smaller, secondary markets.
Image by Kyle Kempt from Unsplash.
Las Vegas is a prime candidate. With rents at $9.02 per square foot and vacancy at 3.1%, the market is certainly tightening up, a JLL report indicates. But the market remains a far less costly play than nearer the coast. Phoenix may look even more attractive, owing to vacancy of 5.5% and rents at $8.95 per square foot. Both markets have significant space for new development, and major highways link the two to Los Angeles within five or six hours.
With leasing interest comes new development. Construction activity has significantly picked up in both Las Vegas and Phoenix. This will likely hold true for some time — especially given the other advantages the markets have, from lower tax rates to growing populations.
Related Questions
What are the benefits of investing in commercial real estate in the Inland Empire?
The Inland Empire has seen strong economic growth throughout 2020, with the area adding nearly 350,000 jobs and the highest percentage increase of any area in California. In addition, area-wide shipping spiked significantly in 2020, which should lead to a sustained increase in demand for industrial properties. Unemployment in the Inland Empire fell over the first quarter of 2019, and is currently approximately 4.3%, roughly equal to the unemployment rate for the state as a whole. Since 2014, the Inland Empire area has seen 22 million square feet of positive absorption for industrial real estate. Vacancies are ranging between 2.0% and 2.5% for the western part of the Inland Empire, while they sit at around 6.5% for the eastern part. The eastern part of the Inland Empire is especially known for its availability of wide open land, which can be utilized for a variety of industrial purposes. In addition, industrial rental rates are continuing to increase, averaging $0.68 per square foot for triple net leases, more than doubling from 2010.
The Inland Empire is also a healthy market for multifamily housing, with its relatively low multifamily inventory and growing job market. If you are looking to buy, develop, or refinance an apartment building in Riverside or San Bernardino counties, our advisors at Multifamily Loans can help you find the best financing options. Our apartment lending team can secure attractive loans through Fannie Mae, Freddie Mac®, banks, and life companies. But we’re also experts at securing CMBS loans and HUD-insured loans.
What are the current trends in commercial real estate in the Inland Empire?
The Inland Empire industrial market’s strong performance is well known and a frequent topic of discussion among investors. Transactions averaged $336 per square foot through July, the Yardi Matrix report showed, the second highest among U.S. markets, beating out Los Angeles by an incredible 15%. And rents are growing faster, up 8.7% over the year compared to 7.0% in L.A. Vacancy rates are also low, at 0.4%.
The area is also seeing a surge in shipping, which should lead to a sustained increase in demand for industrial properties. Since 2014, the Inland Empire area has seen 22 million square feet of positive absorption for industrial real estate. In addition, industrial rental rates are continuing to increase, averaging $0.68 per square foot for triple net leases.
Some tenants are opting for markets even further inland, such as Phoenix or Las Vegas, but this has yet to significantly move the needle in terms of industrial fundamentals.
What are the challenges of investing in commercial real estate in the Inland Empire?
The Inland Empire industrial market is a popular investment destination, but there are some challenges to consider. The area is generally thought to consist of Riverside County and parts of San Bernardino county, the two counties directly east of Los Angeles. While the Inland Empire’s $2.9 billion in closed deals has yet to overtake Los Angeles, it’s not far off. And looking at pricing, it’s blown past: Transactions averaged $336 per square foot through July, the Yardi Matrix report showed, the second highest among U.S. markets, beating out Los Angeles by an incredible 15%.
The area has seen strong economic growth throughout 2020, but there are some signs that some tenants are opting for markets even further inland, such as Phoenix or Las Vegas. This could potentially move the needle in terms of industrial fundamentals, and it could lead to a decrease in demand for industrial properties. Additionally, the eastern part of the Inland Empire has a higher vacancy rate of 6.5%, compared to the western part which is between 2.0% and 2.5%.
Finally, the Inland Empire is located in a seismically active area, and investors should consider the potential risks of earthquakes when investing in the area. It is important to research the seismic history of the area and to ensure that the property is up to code and meets all safety requirements.
What are the best financing options for commercial real estate in the Inland Empire?
The best financing options for commercial real estate in the Inland Empire will depend on your specific needs and financial situation. However, our advisors at Multifamily Loans can help you find the best financing options. Our apartment lending team can secure attractive loans through Fannie Mae, Freddie Mac®, banks, and life companies. We’re also experts at securing CMBS loans and HUD-insured loans. Get in touch with our financing experts today by completing the form below.
What are the tax implications of investing in commercial real estate in the Inland Empire?
The tax implications of investing in commercial real estate in the Inland Empire depend on the specific laws and regulations in the area. Generally, commercial real estate investors in the Inland Empire can deduct employee wages, independent contractor costs, and professional fees on Schedule E of the tax return. Additionally, capital gains changes may affect commercial real estate investors, so it is important to work with a tax professional who is knowledgeable about the area and the current tax laws.
What are the most profitable commercial real estate investments in the Inland Empire?
The Inland Empire is one of the fastest growing industrial markets in the U.S., with strong economic growth throughout 2020. The area has seen 22 million square feet of positive absorption for industrial real estate since 2014, and industrial rental rates are continuing to increase, averaging $0.68 per square foot for triple net leases. Transactions in the Inland Empire have averaged $336 per square foot through July, the Yardi Matrix report showed, the second highest among U.S. markets, beating out Los Angeles by an incredible 15%.
The most profitable commercial real estate investments in the Inland Empire are industrial properties, due to the area's strong economic growth, low vacancy rates, and high rental rates. Investors should also consider markets even further inland, such as Phoenix or Las Vegas, as they may offer even more potential for profit.