Inland Empire Industrial Market Breakdown
Every year I have speaking engagements for groups whether it be for CREW, Southern California Appraisers Institute, CompStak Fireside Chats, etc. where I breakdown aspects of Southern California's Industrial Markets from LA, to OC, to the IE. This quarters presentation is focused on the Inland Empire leasing market. I think you'll find it useful as you make decisions for your company.
This 33 page presentation is available for your download here in PDF format. We're happy to breakdown what this means for your company, your property, your supply chain, and for your finance and operations, so you have what you need to navigate the marketplace.
Executive Summary
* The Inland Empire is nearing bottom. We have healthy absorption, lease rates are bottoming out, existing first and second generation supply is moderately leasing while new supply under development is largely on hold. Southern California is ahead of most other markets like Las Vegas and Phoenix that have not gone through their correction yet.
Market Summary
Public REITs
* The two largest public REIT's in Southern California reported solid new lease signings (though down from peak), hear clients talking about a focus on 3PL's providing flexibility, slightly longer leasing downtime, and opportunistic sales to owner/users at 4-4.5% exit cap rates.
Supply Chains Weigh the Tradeoff of Cost vs Speed
* Tenants are figuring out what the appropriate cost to speed ratio is, per usual, but with the overlay of tariff increases and if they can offset tarrif f implications by shipping slower from lower cost markets and with FedEx and other 3PL's discounting to gain marketshare. With the IE temporarily at parity to Las Vegas and Las Vegas from a base rent perspective, we've even seen a few customers come back from those markets.
Activity In All Size Ranges
* Vacancy has stayed low in the sub 50,000 SF size range, the majority of Q1's leases are in the softest 100,000-500,000 SF size range, and Perris, Moreno Valley, and South Riverside are picking up multiple +500,000 SF leases YTD.
Subleases
* Subleases still remain an elevated part of the Inland Empire. Tenants with a large China import heavy businesses have shed space due to the tarrifs, undoubtedly. There are also multiple EV and 3PL companies literally just closing their doors. This is unwelcome news as we string together multiple quarters of leasing momentum but this is part of the journey. Only a fraction of subleases spaces truly compete with vacant free standing property. Many subleases are part of a larger building, a portion of the warehouse, just the office, just the parking lot, rows of racking that are under utilized. That said, this is still square footage that is tied to space utilization that must be dealt with for more growth to absorb more space.
Finding the Bottom of the Leasing Market
* Today's estimates forecast we are two quarters from calling the bottom of this market. Now a lot can happen in two quarters as we have seen so far this year. And if I've learned anything in my 21 years of industrial real estate brokerage it is to expect surprises every quarter. What I do know is that once there is a shred of confidence, investors will not miss the opportunity to raise rates. We see some well healed investors, who are value add focused, try to wait in order to capture higher lease rates so they can sell in the next 5 years. Or trying to do 1-3 year lease terms at fractions of market rates to pass the time. Is this prudent strategy, or avoiding the bad news that market rents are lower than they were underwritten. Perhaps a bit of both depending on the asset, the portfolio, and the owners capital stack.
Download
Download the entire presentation , send me feedback, and let me know what I can be doing to be useful to you. Our team is dedicated to understanding your vision and crafting strategies and tactics to navigate todays market to get you results. Let me know when you have time in your schedule to connect.
Best Regards,
Justin
Justin Smith, SIOR MBA, MRED, MCR, MSCM Candidate Senior Vice President | Principal Lee & Associates | Irvine
D 949.790.3151 C 949.400.4786 O 949.727.1200 jbsmith@lee-associates.com (mailto:jbsmith@lee-associates.com) ____________________________________
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