Inland Empire Industrial Demand Surges

Net absorption rebounds in Q2 with strong leasing activity in IE West.

The industrial market in Southern California's Inland Empire rebounded in the second quarter, with overall positive absorption and increased activity countering falling rates and rising vacancy.

Positive net absorption in the two-county market, which stretches from the city limits of Los Angeles to the Arizona border, totaled 3.8M SF—a swing of nearly 5M SF from the negative Q1 total of minus 964K SF.

Vacancy rose 90 bps quarter-over-quarter to 6.8% in Q2 2024, driven primarily by 5.3M SF of vacant deliveries. Sublease space decreased to 16.9M SF from the Q1 level of 18.5M SF, according to a new market report from CBRE.

The development pipeline in Inland Empire fell below 15M SF for the first time since 2013 in Q2, as 10.6M SF of deliveries outpaced 5.5M SF of new construction starts.

New leasing in Inland Empire totaled 11.7M SF in the second quarter, outpacing the previous quarter by more than 1.5M SF. Renewal activity dipped to 5.5M SF in Q2 from 6.7M SF in the first quarter, the report said.

The Q2 industrial activity was driving by large leases, including 35 new leases and 13 renewals that each encompassed more than 100K SF and one lease that was inked for more than 1M SF.

Lease rates fell quarter-over-quarter to $1.27 NNN per SF per month in the second quarter—the fourth consecutive quarter of rate drops—from $1.36 NNN per SF per month in Q1 2024.

Positive absorption and strong leasing activity in the western half of Inland Empire outpaced negative absorption in the IE East submarket. IE West notched 5.4M SF of positive absorption, while IE East registered 1.6M SF of negative absorption.

Ontario and Fontana saw the highest absorption across the Inland Empire, while negative absorption in Colton, Moreno Valley, Redlands and Riverside led to 1.6M SF of newly vacated space in IE East, CBRE reported.

Development in IE West continues to outpace IE East, the largest warehouse cluster in the U.S. where there are a diminishing number of tracts available for large projects.

IE West had 8.4M SF of industrial space delivered in the second quarter, including five projects that were all pre-leased with each encompassing more than 500K SF. Ground was broken for 2.8M SF of warehouses in IE West in Q2.

"The Inland Empire industrial market is poised to reap the benefits of slowing development and increasing demand," CBRE's market outlook said. "Rates were more affordable than other major Southern California markets, underscoring the Inland Empire as the best choice for large occupiers and developers to find industrial space."

Source: GlobeSt/ALM