Vacancy rates have risen steadily in IE following a surge in retail demand during the COVID-19 pandemic. (Photo: Riverside, CA by Thomas De Weveristock photo)
REDLANDS, Calif. — The industrial real estate market in the Inland Empire is experiencing some unique shifts, according to the CBRE Inland Empire Industrial Report for Q1 2024. Most notably, the report highlights a surge in vacancy rates and a slowdown in demand.
Why it matters: The Inland Empire has become an industrial hub, specifically over the past few years, with the rise of next-day shipping and high consumer demand during the COVID-19 pandemic. Approximately 600,000 truck trips are conducted in the area daily due to the 1 billion square feet of warehousing, intermodal rail yard and freight airports, according to the Pitzer College Robert Redford Conservancy of Southern California Sustainability.
Changes and trends in the industrial sphere can significantly impact surrounding areas, from the job market to land use. The reported industry slowdown comes as the city of Redlands is considering adding about 550,000 square feet of new distribution warehousing on Tenneesee and California streets.
Key findings: The report, published by commercial real estate services and investment firm CBRE Group Inc., showed that the vacancy rate for industrial spaces in the Inland Empire has surged to 5.9%, the highest it has been in several years. This upward trend is primarily driven by the 3.8 million square feet of newly constructed yet vacant industrial space.
Chart showing overall vacancy rate for the Inland Empire Q1 2024. Source: CBRE Research |
Particularly striking is Redlands, which recorded a higher-than-average vacancy rate of 11%.
The report states, "The IE led all U.S. markets in available sublease space as the COVID-19 industrial surge left occupiers with more space than was necessary as the economy moved towards normalization."
Construction and lease trends
Despite the rising vacancy rates, construction activity remains robust. At the end of Q1 2024, there were 20.4 million square feet of industrial space under construction, marking an increase of 200,000 square feet from the previous quarter. The report noted that larger projects are more prevalent in the Inland Empire West, stretching Fontana to Chino Hills.
The first quarter also saw a surge in mega-leases, with five deals signed for spaces larger than 1 million square feet. This is significant when considering that only seven such deals were signed throughout the entirety of 2023. This increase ties back to vacancy. The heightened availability of space due to new developments and recent tenant move-outs resulted in more opportunities for these mega-leases. Remarkably, four of these five leases were new deals.
Despite the uptick in mega-leases, overall demand for industrial spaces has waned, leading to longer market times and negative net absorption - where more space becomes vacant than is leased over a specific period. For just the third time in 15 years, more space has been vacated than leased from one quarter to the next in the Inland Empire overall. This trend was particularly noticeable in the eastern part of the IE, with new vacancies in Redlands, Rialto, and San Bernardino, resulting in a surplus of 3 million square feet of vacant space.
However, the area of the IE West did see a 2 million more square feet occupied than vacated during the first quarter.
The local job market reflects these changes. From January to February 2024, jobs in transportation, utilities, and manufacturing fell by 5,100, even as construction jobs saw a modest increase.
Market outlook: The world's leading industrial developer and landlord, Prologis Inc., warned of weakening industrial demand in its first quarter revenue report on April 17.
"While operating conditions are healthy in the majority of our markets, customers remain focused on controlling costs, which is weighing on decision making and the pace of leasing," said Hamid R. Moghadam, co-founder, chairman and CEO, Prologis.
Moghadam added that Prologis remains optimistic about its business stability "while being prepared for a slower environment in the next quarter or two."
Prologis currently advertises 837,000 square feet of available warehousing in Redlands.
