“Oversupply bubble” deflates industrial rents for the Inland Empire

Sun Life Financial blames falling warehouse rents for lowering values of its portfolio

“Oversupply Bubble” Deflates Industrial Rents for the Inland Empire
Randy Brown of Sun Life Financial and warehouses in the Inland Empire (Getty, Sun Life Financial)

A growing number of empty warehouses across the Inland Empire has pushed properties owned by Sun Life Financial and other investors into a valuation slump.

The Toronto-based insurer and asset manager said the value of its U.S. real estate holdings fell 15 percent in the first quarter to $1.3 billion from a year earlier, Bloomberg reported, citing an earnings call. Mark-to-market valuations were down 6.7 percent from the previous period.

The primary reason: falling rents in the Inland Empire, a key hub for big-box and e-commerce logistics, according to Randy Brown, Sun Life’s chief investment officer. 

“We had seen outsized gains there in prior quarters. This quarter, we had a cap-rate and yield decompression, which we expect, but also a drop in the achievable rents,” Brown told investors on the call.

“There had been very strong development completions and extensive growth in that specific area throughout the pandemic — which led to an oversupply bubble that’s putting downward pressure on rents.”

While vacancy rates for industrial properties across greater Los Angeles have been on the rise, Brown said that Sun Life’s properties in the IE were fully occupied, with strong tenants in extended leases. The extent of its IE holdings was not disclosed.

San Francisco-based Prologis, a major owner of warehouses in the U.S., lowered its earnings guidance this year as the landlord faces lower average occupancies, according to Bloomberg. The leasing slowdown was highest in Southern California and the Inland Empire, Chief Financial Officer Tim Arndt said on an earnings call last month.

As of January last year, some 4,000 warehouses took up 1 billion square feet of the Inland Empire, with another 170 million square feet in the pipeline, according to CalMatters. 

Industrywide, the first quarter ushered in the sixth consecutive three-month period of declining net absorption, at 27.9 million square feet absorbed nationally, according to JLL. 

Industrial vacancy also rose to 6.1 because of lower tenant demand and a rise in warehouse construction, with higher than average completions. 

By Savills’ estimate, the national vacancy rate is 6.7 percent, with some top industrial markets posting double-digit vacancies, including Savannah, Georgia, at 12.1 percent, Phoenix at 11.8 percent and Dallas-Fort Worth at 10.8 percent.

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Industrial vacancy in the IE rose 1 percent to 7.8 percent in the first quarter, from the previous three months, and increased 4.9 percent year over year, according to Savills, while leasing activity dropped by 500,000 square feet.

Available sublease space jumped by 33.3 percent to more than 20.3 million square feet — the highest amount on record. Vacancy is expected to continue to increase this year, the Savills report said.

Rents for industrial real estate across Southern California have plunged for the first time since the Great Recession, according to CoStar Analytics.  At the same time, IE tenants shed more than 2 million square feet of warehouse space.

Discounted sublease space has dragged rents down as it floods the market, accounting for 21 percent of total availability across Los Angeles, Orange County and the IE combined. Typical subleases rent for 25 percent less than directly available space.

A couple of years ago, industrial vacancy in L.A. and OC was under 2 percent. Since then, industrial vacancy has grown to more than 5 percent in L.A., and 4 percent in OC.

But in Riverside and San Bernardino counties, which make up the IE, industrial vacancy reached nearly 7 percent, according to CoStar, which blamed a combination of heavy supply growth and occupancy loss, with typical asking rents falling 4 percent.

Amazon.com, considered a “first mover” in industrial real estate, could help push the nation out of its post-pandemic warehouse slump.

The Seattle-based e-commerce behemoth, among the nation’s biggest occupiers of warehouses, has restarted expansion of its logistics footprint, suggesting gains could be ahead for the industrial market.

Last month, Amazon leased two distribution warehouses of 1 million square feet each in the Inland Empire.

— Dana Bartholomew

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