Inland Empire: Local Warehouse Market Continues to Grow

Inland Empire Business Journal, Sep 01, 2006

Development activity in the Inland Empire industrial market is exploding as builders respond to high levels of warehouse demand. Tenant demand has been especially strong among large users, as many major companies continue to set up distribution facilities in the region due to its lower operating costs and excellent transportation infrastructure. Additionally, the region is widely recognized as a primary distribution hub for the western United States. Companies including: Ashley Furniture, Quicksilver and UPS all signed leases recently for spaces greater than 600,000 square feet. Submarkets including the Airport, Riverside and East San Bernardino are registering some of the most significant leasing activity this year, which is helping to offset much of the new construction. Last year, net absorption for these three submarkets totaled to 13 million square feet, with another 8.9 million square feet absorbed in the first half of 2006. While demand for local warehouse and distribution space is strong, there are some supply-side concerns. Developers have more than 43 million square feet planned around the Southern California Logistics Airport in Victorville alone.

Transaction velocity is expected to remain robust in the Inland Empire as investors seek to establish a presence in one of the strongest industrial markets in the nation. With few exceptions, buyers are picking up nearly all properties coming to the market. Investor competition drove the median price up 15 percent in 2005 to $88 per square foot; buyer optimism remains apparent, with prices up another 7 percent to date in 2006. The Ontario Airport area remains a favorite location for many buyers as tenant demand is high and rents continue to rise steadily. The median price in the submarket increased 20 percent in 2005 to $85 per square foot and has since climbed above the $90 mark.

* Vacancy Forecast: Tenant demand is robust but it is forecast to fall short of new supply, which is on track to reach a decade-high level in 2006. Overall, a 100 basis point increase to 7.2 percent is expected.

* Rent Forecast: New space is filling relatively fast, and rents continue to rise. Asking rents are expected to increase 4 percent this year to $5.43 per square foot.

* Investment Forecast: Longer-term growth potential will support prices even as vacancy rises. In spite of price appreciation, there are still upside opportunities. In San Bernardino, for example, cap rates exceed the market average and tenant demand is strengthening.

Marcus & Millichap Industrial Report 2006