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.

Developers remain interested in new speculative construction activity. In the past 12 months, 15.2 million SF of new supply was added to the base. During this time, the vacancy rate reached a new low as nearly all new supply was absorbed by large tenants seeking modern distribution centers.

Key Takeaways:

  • The vacancy rate continued to inch downward, falling 10 basis points to 3.7%. This was due to continued strong industrial demand that has continued to surpass construction completions.
  • Asking rents increased $.01 per square foot (psf) per month triple net (NNN) over the quarter and have increased $0.04 over the past 12 months to end at $0.56 in Q3 2017. Rents were also $0.11 higher than the previous peak of $0.45 PSF NNN in 2007.
  • Net absorption totaled 6.6 million square feet (SF) for the quarter, due in large part to the 6.2 million SF added to the base. Roughly 50% of new industrial space was leased or sold before completion.
  • Construction completions this quarter totaled 6.2 million SF. There remains 26.1 million SF currently under construction.

Outlook:

Annualized gross and net absorption is at the highest point ever. 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 footprints. 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 Western United States. E-commerce has grown from 3.5% of all retail sales in 2007 to 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.