1. real estate

Real Estate Outlook
inland empire
industrial Market
Third quarter 2014
No sign of slowdown in the Inland Empire industrial market
Market fundamentals remain strong in the second half 2014
In the third quarter 2014, the Inland Empire industrial market once again saw
high transactional volume and more development projects breaking ground. As
Fortune 500 retailers and their third party logistics (3PL) firms continue to take
large space within the market due to an improving US economy, developers
have been quick to respond to demand with over 14 million square feet now
underway market-wide. Assuming no slowdown in US economic growth, expect
the Inland Empire industrial market to finish 2014 strong with positive market
fundamentals to continue into 2015.
econom y
TRENDLines
5- YE A R Trend
C u rrent Q uarter
VACANCY
5.0%
Vacancy flat for third
straight quarter
A B S O R PT I ON
Higher GDP growth estimates show US economy in expansion mode
3.6 million SF
With the Bureau of Economic Analysis revising its second quarter GDP growth
estimate to be 4.6% on an annualized basis, the overall US economy has
grown much faster as the year has gone on despite suffering much colder
winter conditions that negatively affected the economy to begin 2014. With
other economic indicators up including personal consumer expenditures,
manufacturing activity, and port volumes, the US economy has been in
expansion mode for much of the year. As a result, the Inland Empire industrial
market has benefited from increased consumer confidence although concerns
over a slowdown in the global economy will continue to be prevalent looking
into next year.
Eight straight quarters of
positive net absorption
R ENTAL R ATE
$0.40 PSF
Highest average rent
since Q1 2009
UNDE R CON S T R UCT I ON
14.4 million SF
Just 29% is pre-leased
S u p p ly a n d D e v e l o p m e n t
Four projects, each over one million SF, lead strong development
In the third quarter, 5.4 million SF was completed in the Inland Empire. Of this
amount, 63% was delivered vacant. The total amount of industrial space now
under construction stands at 14.4 million SF with 29% of the space already preleased. In addition, 67% or over two-thirds of all development underway is in the
Inland Empire-East as industrial developers look further east to areas such as San
Bernardino, Moreno Valley, and Redlands. With four (4) industrial projects over
1 million SF now underway in the Inland Empire led by Wal-Mart’s 1.4 million
SF build-to-suit project in Chino, it will be interesting to watch how long newly
delivered speculative projects sit vacant on the market moving forward.
CAP R ATE S
5.2%
Cap rate compression
continues
JOB GROW TH
33,700 jobs
Metro employment up
2.8% year-over-year
INLAND EMPIRE industrial Market
third Quarter 2014
demand
CONSUMER SPENDING GROWTH
Higher leasing activity as e-commerce drives industrial demand
UNITED STATES
1.5%
1.0%
0%
-1.0%
-1.5% 05
06
06
08
09
10
11
12
13
14
SOURCE US Dept of Commerce
Demand for industrial space was again strongly positive at 3.6 million SF. This
brought 2014 year-to-date net absorption to 12.2 million SF which is slightly
down from the 12.4 million SF of net absorption reported in the first 9 months
of 2013. Major leases signed in the third quarter included Wal-Mart signing a
1.4 million SF build-to-suit with Majestic Realty in Chino, Amazon.com signing
a 704,115 SF lease with Clarion Partners in Redlands, and 3M Company signing
a 454,877 SF build-to-suit with Trammell Crow in a consolidation of facilities in
Ontario. For the remainder of 2014 and into the first part of 2015, expect more
large deals signed throughout the market as Fortune 500 companies continue to
respond to strong consumer demand.
PURCHASING MANAGERS INDEX
VACANCY
UNITED STATES
75
50
25
0 05
06
07
08
09
10
11
12
13
14
SOURCE Institute of Supply Management
Total vacancy flat as newly delivered vacant buildings hit the market
Despite the strong amount of net absorption reported in the third quarter,
the total vacancy rate in the Inland Empire industrial market remained flat at
5.0%. With an additional 5.4 million SF of space completed of which 63% was
delivered vacant, the amount of vacancy absorbed in existing buildings was
barely offset by vacant space from newly constructed buildings. Assuming more
under-construction projects are completed over the next several months, the
Inland Empire industrial market might see a modest increase in vacancy levels if
leasing activity does not keep pace with new supply.
COMBINED PORT VOLUMES
R ENTAL R ATE S
LOS ANGELES/LONG BEACH PORTS COMBINED MILLION TEUs
20
15
10
5
0
05
06
07
08
09
10
11
12
13 14 YTD
SOURCE Ports of LA and Long Beach
Weighted average asking rental rates flat, but still up year-over-year
The weighted average asking rental rate market-wide remained flat at $0.40
PSF per month (up 10.3% year-over-year), but was still the highest reported
industrial average asking rental rate market-wide since the first quarter 2009.
Weighted average rental rates have increased mostly due to improved market
fundamentals, but any slowdown in leasing activity and net absorption may
affect rental rate growth as the large amount of under construction projects
in the Inland Empire may cause a vacancy increase down the road. Assuming
current leasing conditions hold and the US economy remains in expansion
mode, expect average rental rates to continue rising into the first half of 2015.
Metro Inland Empire Industrial Market Indicators
Property Class
Warehouse/Distribution
inventory
Under
construction
Q3 NET
ABSORPTION
ytd Net
absorption
direct
vacancy
sublease
space
total
vacancy
average
rate psf
364,923,679
14,369,655
3,537,882
11,997,389
5.0%
0.3%
5.3%
$0.40
Manufacturing
62,591,980
0
72,971
312,244
3.6%
0.0%
3.6%
$0.39
IE Metro Total
427,515,659
14,369,655
3,610,853
12,309,633
4.7%
0.3%
5.0%
$0.40
2 R E AL E STATE Outloo k INLAND EMPIRE INDUSTRIAL MARKET Q 3 2 0 1 4
I NVE S TMENT MA R K ET
Investment sales activity down over last due to lack
of product for sale
In the third quarter, the Inland Empire industrial market saw
$269.0 million worth of investment sales (down 27% yearover-year). This brought 2014 year-to-date total investment
sales volume to $755.7 million which is down 44% from the
first 9 months of 2013. While the Inland Empire industrial
market is considered a core gateway industrial investment
market by many institutional investors, the lack of Class A
product for sale has caused many investors to shift focus to
other industrial markets or into ground-up development.
Despite the lack of product for sale, however, expect
several new and recently leased properties to trade before
year-end as landlords take advantage of the intense
investor appetite for yield.
METRO INLAND EMPIRE NET ABSORPTION AND VACANCY
NET ABSORPTION MILLION SF
9.0
20%
6.0
15%
3.0
10%
0
-3.0
5%
05
06
07
08
09
10
11
12
13
14
Inland Empire industrial market is peaking, but for
how long?
In the second half 2014, the Inland Empire industrial
market has reported strong positive market fundamentals
across the board in direct correlation with the improved
health of the overall US economy. As e-commerce has
now seen its share of total retail sales increase to 6.4% and
growing according to the US Department of Commerce,
it is no surprise that retailers have been building out their
supply chains for next day and same day delivery. With
nowhere left to build in Southern California, it is also no
surprise that the Inland Empire has become the direct
beneficiary due to its proximity to Southern California’s 20
million residents, the Ports of Los Angeles and Long Beach,
as well as relatively cheap land and an abundance of labor.
As 2014 quickly comes to a close, the market is peaking
but as mentioned previously, any slowdown in overall
economic conditions could adversely affect the market
relatively quickly. n
0%
SOURCE: Transwestern
METRO INLAND EMPIRE RENTAL RATES VS. CONSTRUCTION
UNDER CONSTRUCTION MILLION SF
OUTLOO K
VACANCY
AVERAGE RENTAL RATE
30
$0.50
20
$0.40
10
$0.30
0
05
06
07
08
09
10
11
12
13
14
$0.20
SOURCE: Transwestern
METRO INLAND EMPIRE HISTORICAL SALES TRANSACTION ACTIVITY
METRO INLAND EMPIRE SALES VOLUME MILLIONS
800
600
SOURCE: Name goes here
400
200
0
06
07
08
09
10
11
12
13
14
SOURCE: Real Capital Analytics
R E A L E STATE Outloo k INLAND EMPIRE INDUSTRIAL MARKET Q 3 2 0 1 4 3
INLAND EMPIRE INDUSTRIAL MARKET
third Quarter 2014
Metro Inland Empire Industrial Market Indicators
MARKET AREA
Under
construction
inventory
Q3 NET
ABSORPTION
ytd Net
absorption
direct
vacancy
sublease
space
total
vacancy
average
rate psf
Inland Empire-West
254,329,705
4,717,181
602,917
3,009,517
4.6%
0.4%
5.0%
$0.40
Inland Empire-East
173,185,954
9,652,474
3,007,936
9,300,116
4.8%
0.3%
5.1%
$0.37
427,515,659
14,369,655
3,610,853
12,309,633
4.7%
0.3%
5.0%
$0.40
IE Metro Total
MA J O R LEA S E ACT I V I TY
PROPERTY
tenant
sf
type
market AREA
submarket
NWC Kimball Ave & Euclid Ave
Wal-Mart
1,445,200
New Lease
Inland Empire-West
Chino
2125 W San Bernardino Ave
Amazon.com
704,115
New Lease
Inland Empire-East
Redlands
5153 E Philadelphia St
3M Company
454,877
New Lease
Inland Empire-West
Ontario
5300 Shea Center Dr
Emser Tile
432,313
Renewal
Inland Empire-West
Ontario
MA J O R S ALE S ACT I V I TY
PROPERTY
price
price psf
buyer
market AREA
submarket
1710 W Base Line Rd
$67,500,000
$94
TIAA-CREF
Inland Empire-East
Rialto
6207 Cajon Blvd
$55,477,273
$67
Industrial Income Trust
Inland Empire-East
San Bernardino
630 Nicholas Rd
$30,000,000
$50
Ambest Real Estate LLC
Inland Empire-East
Riverside
Redlands Corporate Center (12 bldgs)
$27,500,000
$68
Stockbridge Capital Group
Inland Empire-East
Redlands
DEVELOPMENT ACT I V I TY
PROPERTY
NWC Kimball Ave & Euclid Ave
sf
1,445,200
type
developer
market AREA
submarket
Class A Warehouse/Distribution
Majestic Realty
Inland Empire-West
Chino
4120 Indian Ave
1,131,511
Class A Warehouse/Distribution
Prudential Real Estate Investors
Inland Empire-East
Perris
8728 Etiwanda Ave
1,033,565
Class A Warehouse/Distribution
Goodman Bircher
Inland Empire-West
Rancho Cucamonga
Contact
Methodology
Michael Soto
Research Manager, Southern California
213.430.2525
michael.soto@transwestern.com
The information in this report is the result of a compilation of information on industrial
properties located in the Riverside-San Bernardino-Ontario metropolitan area. This report
includes warehouse/distribution and manufacturing properties 10,000 SF and larger,
excluding R&D/flex facilities and industrial condominium buildings.
601 S. Figueroa Street, Suite 2750
Los Angeles, California 90017
T 213.624.5700 F 213.624.9203
www.transwestern.net/losangeles
Copyright © 2014 Transwestern. California Brokerage License #01263636. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information
contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such
information and expressly disclaims any responsibility for any inaccuracy contained herein.