Industrial vacancy in Inland Empire loosens to 1.5%

Has the day finally come when the industrial market starts to cool down?

The industrial vacancy rate in the Inland Empire — encompassing Riverside and San Bernardino counties — ticked up for the first time since the pandemic to 1.5 percent in the third quarter, according to a Savills report. In the second quarter, 1.2 percent of industrial space was vacant in the region.

Fewer lease deals were signed, too — about 3 million square feet of space was taken off the market in the third quarter, less than half of the 7 million square feet worth of deals signed in the third quarter of 2021.

The 1.5 percent vacancy rate is still historically low, propelled by a surge of companies looking to reconfigure how they store and distribute goods. Firms have turned to lease properties in the Inland Empire, given its proximity to the ports in L.A. and the ability to find newer warehouses.

Developers, including Prologis and its competitor-turned-subsidiary Duke Realty, are racing to take advantage of vacant land in the desert and build new complexes.

But, “despite a record amount of space under construction, the continued ultra-low
vacancy rate suggests there is not enough available inventory,” Savills said in its report.

Developers also face high interest rates and rising construction costs, not to mention local measures from Inland Empire cities attempting to block warehouse projects. Pomona, Redlands, Norco and Colton have all implemented policies to pause new warehouses. In the city of Pomona, developers can’t build any new warehouses until the first half of 2023.

The Federal Reserve Bank’s interest rate hikes to fight inflation raises development costs and the possibility of a rollback in consumer spending, which would affect both tenants and landlords. Amazon.com, the largest industrial tenant in the U.S., said it expects its second Prime Day sales event this month will be less lucrative than its previous, which was held earlier this year, according to Business Insider.

Some companies are still pushing forward, despite the warnings.

Fast fashion firm Shein signed a lease in September to open a 1.8-million-square-foot distribution center in the Inland Empire city of Cherry Valley — a property under development by Shopoff Realty Investments and Artemis Real Estate Partners. The deal was the largest lease signed in the third quarter, according to Savills.