Rents Surpassing Peak in Inland Empire
January 28, 2015
ONTARIO, CA—Some size ranges of industrial space in this market are under such great demand that rents continue to climb, CBRE’s vice chairman Darla Longo tells GlobeSt.com exclusively. We spoke with Longo in advance her deal-making panel at RealShare Inland Empire this week to get her take on this thriving market and where she sees it heading.
GlobeSt.com: In what geographic areas of the Inland Empire do you feel there is untapped opportunity for deal making?
Longo: The Inland Empire is a very fluid market, and the group of investors and developers in this market are very sophisticated. I don’t think there’s anything “untapped” in the sense of everybody’s looked at everything in the market, and the Inland Empire East is still growing and expanding. That’s where the next wave of growth will happen in terms of availability. It’s all been tapped; it’s driven in large part by the demand of where the users are looking to locate and also the availability of entitled land with the ability to build. In California, it’s very hard to get entitlements to build, so opportunity lies in what cities you can go to and go through the entitlement process. That’s the driving force.
GlobeSt.com: What property sectors still have untapped potential for this market?
Longo: The office market is finally back. Vacancy levels in the office market have dropped substantially, and that is a segment of the market, particularly in the Inland Empire West, that has already come back. Within the next couple of years, we are going to experience a shortage of supply because nobody is building and the population is growing and expanding. The first sector to have recovered is industrial, and retail is coming back in terms of what that will be with the e-commerce phenomenon. Clearly, multifamily and industrial are the two leaders in that market, and that’s kind of across the board.
GlobeSt.com: How would you characterize the deals that have been done in the market, and what does the future look like for deals?
Longo: As it relates to industrial, the trends are a consumer-driven market, and e-commerce has been the highest demand in the market. We see that continuing. The trend toward the big boxes is continuing because of the sophistication of material-handling equipment, and because material-handling equipment has advanced, developers can build buildings of higher clear heights—36 ft. to 40 ft. They’re also not over-covering the site to allow for excess parking—that trend will continue.
The other trend that has happened recently is that buildings less than 400,000 square feet have definitely recovered, and small businesses have recovered. The market will consider small rental spikes in the next few years as a result of that recovery. We are in a healthy growth period and hope to stay the course over the next two to three years. The capital markets view Inland Empire as the primary market in the country in which to invest, and Inland Empire West is probably the number-one market in the country. As a result, there has been cap-rate compression into the low 4s on class-A assets, and we will see some in class-B assets. Over the next four years, we will see newer construction in smaller size ranges that we have not seen in years.
GlobeSt.com: Anything else you’d like to add about deals and opportunities in this market?
Longo: We will definitely see continued class-A cap-rate compression. Also, certain size ranges are back to peak rents, and for the first time in the history of the Inland Empire, we will surpass peak rents. We are starting to see not only distribution, but some light manufacturing come back, which is encouraging. We have a huge influx of foreign investors wanting to enter into the US, and candidly, they’re buying all segments: office, industrial, retail and multifamily. We are starting to see influxes of Asia and Europe; we already had influxes of Canada, and that is continuing. The fact that there are so many foreign investors interested in the industrial sector is new—in the past, they wanted to buy trophy office buildings, but now they are proactively entering into the industrial arena.