Lowest Ever Vacancy Rate Drives Up Rates

The Inland Empire market remains the most sought-after warehouse / distribution market in the United States, with the lowest vacancy rate and highest rental rate of comparable major distribution hub markets. New speculative construction activity remains on the minds of developers. In the past 12 months, there has been a total of 12.3 million SF of new supply added to the base. During this time the vacancy rate has reached a new low as nearly all new supply has been absorbed by large tenants seeking modern distribution centers.

Key Takeaways:

  • The vacancy rate has reached a record low of 3.8%. This is due to continued strong industrial demand and low construction completions for the quarter.

  • Asking rents increased $0.01 PSF NNN over the quarter and have increased $0.05 PSF NNN over the past 12 months to end at $0.55 PSF NNN in Q2 2017. Rents are also 10 cents higher than the previous peak of $0.45 PSF NNN in 2007.

  • Net absorption totaled 4.7 million SF for the quarter, due in a large part to 3.4 million SF added to the base. Roughly 70% of new industrial space was pre-leased or pre-sold before completion.

  • Construction completions this quarter were 3,467,200 SF. Inclement weather during El Niño has pushed many industrial projects back a quarter.

Outlook:

The market is at an all time high for asking rents and an all time low for vacancy rate. Demand remains strong and continues to outpace supply. This is leading to increased construction for large modern distribution centers, driven largely by E-commerce companies further expanding their industrial footprint. Amazon and other online retailers have disrupted the retail landscape. Consumer preferences have changed the nature of traditional distribution models. This disruption has benefited the Inland Empire which serves as the vital hub of E-Commerce in Southern California and the Western United States. E-Commerce has grown from 3.5% of all retail sales in 2007 to currently 8.5% of all retail sales in 2017. The pace of this growth has not slowed. As the percentage of retail continues to grow, so too will the need for industrial space.