2017 Ends With High Gross Absorption
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 markets with major distribution hubs.
Developers remain interested in new speculative construction activity. In the past 12 months, a total of 21.8 million square feet of new supply was added to the base. During this time, the vacancy rate remained low as nearly all new supply was absorbed by large tenants seeking modern distribution centers.
- The market finished strong the year with sales and leasing activity totaling 11,314,700 square feet for the quarter, broken out into 16 sales (787,500 square feet) and 101 leases (10,527,200 square feet). Year to date, gross absorption was 42,240,200 square feet.
- Construction completions totaled 8,728,700 square feet, much of which was pre-leased prior to completion.
- Asking rents increased $0.02 per square foot (PSF) per month triple net (NNN) over the quarter and have increased $0.05 over the past 12 months to end at $0.58 in the fourth quarter of 2017. Rents were also $0.13 higher than the previous peak of $0.45 PSF NNN in 2007.
- Net absorption totaled 3,417,300 square feet for the quarter, due in large part to the 8.7 million square feet added to the base. Roughly 50% of new industrial space was leased or sold before completion.
Vacancy is near an all-time low and further declines will be hard to achieve. This is especially true given that 20.7 million square feet remains in the construction pipeline. Absorption is likely to remain positive for future quarters as buildings are constructed. Growing tenants have few options in Southern California, and the Inland Empire will attract tenants from infill markets. Rents are at an all-time high. This is due to rising market conditions for new buildings with state-of-the-art features, which is reflected in the rental rate. These newer buildings allow tenants to be more efficient by lowering operating costs and increasing the velocity at which goods can be sorted and shipped. This is especially true for e-commerce-related tenants that require specialized build-outs.
Low vacancy rates and rising rents are leading to increased speculative construction. Next quarter may see upwards of 3.6 million square feet brought to market. Large, fully leased assets in a prime location command a significant premium in the Inland Empire, which is considered a core market for institutional industrial investors. 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.