Inland Empire Industrial
Industrial market has strong long-term fundamentals.


Last year brought rapid change to the Inland Empire industrial market, which finished 2008 with increased vacancy rates, rising cap rates, negative absorption and negative rent growth. Throw in the region’s unemployment rate of 10 percent — one of the highest in the country — and it’s no surprise that the Inland Empire industrial sector will continue to have its challenges in 2009. That said, this market is viewed by most as having strong long-term fundamentals, which will continue to attract institutional capital and drive tenant demand.

Industrial leasing is expected to remain soft this year with landlords going to great lengths to secure and retain occupancy. Vacancy rates, currently at 22 percent in the east and 12 percent in the west, will continue to trend upward as leases expire and companies continue to downsize. Effective rental rates have dropped 20 to 25 percent in the last 9 months, with flat to negative rent growth expected for 2009.

As retailers continue to downsize and outsource their distribution function, third-party logistics providers will pick up the slack. Southern California is home to more than 21 million people, who may be buying fewer jet skis and flat-screen TVs, but will still need toothpaste, laundry detergent and food. This is evidenced by Kenco Logistics Services’ recent signing of a 5-year lease for the entire 517,346-square-foot building within Watson Commerce Center Redlands. Kenco will operate this facility on behalf of the consumer products company Ralston Purina.

The investment segment is certainly not immune from the global credit crisis. Nationwide, approximately $800 billion of commercial real estate debt (CMBS and direct loans) will need to be refinanced in the next 5 years. With a lack of liquidity eroding buyers’ purchasing power, coupled with owners’ reluctance to sell into a down market, activity will be sparse. Cap rates, while very difficult to quantify due to the absence of recent investment activity, are estimated to have returned to 2004 levels.

The market will see little to no spec development in 2009 due in a large part to an increased supply of existing product and a lack of available financing. Construction loans currently are very difficult to obtain with lenders wary to see product coming to market in a time of weak demand and limited long-term financing options.

In the next 12 months, Inland Empire industrial leasing and investment will no doubt continue to struggle, however with Southern California’s population base and the gateway ports of Los Angeles and Long Beach, demand will come back, rental rates will stabilize and property values will climb back up. We will just have to have some patience until it gets there.

— Michael Fowler is executive vice president at Jones Lang LaSalle’s
downtown Los Angeles office.


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