Inland Empire's Industrial Market Experiences a Shift: Is This a Turning Point or a Temporary Setback?
The industrial market landscape of the Inland Empire is undergoing a dynamic change, reflecting shifts in broader economic conditions and commercial real estate trends. This region, once a hub of thriving commerce and bullish demand, is witnessing softened demand, a trend reinforced by decreasing consumer spending growth and slowing imports to the Southern California ports.
A Closer Look at the Numbers
Occupancy levels in the region plummeted by 2.1 million square feet in the second quarter, an alarming figure further accentuated by a decline of another 6.1 million square feet in July and August. While on the surface, the decline of over 2 million square feet over the past year might appear modest, it is essential to look beyond the numbers to uncover the underlying story.
Interestingly, it’s not that tenants are fleeing the Inland Empire en masse. The real narrative here is a massive migration from older establishments to newer ones. Since the beginning of 2020, there has been a gain of over 15 million square feet in occupancy in the newly erected buildings. However, this silver lining is overshadowed by a net loss of 17 million square feet from buildings that saw completion before 2020. The resultant impact? The vacancy rate in these second-generation buildings jumped from a historical low of 1% in 2021 to the present 4%.
Major Exits Fuel the Decline
Several major tenants have contributed to the declining occupancy:
Sears: A significant exit, vacating an 824,000-square-foot distribution building in Ontario. The facility is now up for sublet at an ambitious asking rate of $12, triple-net.
Hillman Solutions Corp: The hardware manufacturing and distribution giant left behind a sprawling 610,000 square foot warehouse in Rialto Commerce Center.
Capital Freight Systems: This logistics provider wrapped up its operations in a 504,000-square-foot facility in Riverside.
Ashley HomeStore: The renowned furniture retailer moved out of a 501,000-square-foot building, leaving it available for sublet until October 2028.
Insights and Predictions
Shift in Preferences: The migration of tenants from older to newer buildings suggests that businesses are seeking modern facilities equipped with the latest infrastructure, thereby enhancing operational efficiency.
Market Saturation: The declining demand might be a sign of market saturation or a reaction to external economic conditions. The global supply chain disruptions and ongoing changes in trade dynamics could be influencing the slowdown at Southern California ports.
Recovery Ahead?: It's crucial to consider whether this trend is a short-term phenomenon or if it signifies a more prolonged downturn. The Inland Empire's strategic location and infrastructure might make it poised for a quick recovery if broader economic conditions improve.
Navigating through its challenging phase, the Inland Empire requires a nuanced perspective on the current trend. As tenant preferences lean towards modern facilities, older buildings may face short-term vacancies. However, this could also signal a wave of redevelopment and innovation in the region's industrial market. The future will reveal if this is merely a fleeting moment or an indicator of deeper, lasting shifts.