Industrial Sector in Inland Empire Struggles Post-Pandemic

The dropoff in demand for industrial space in the Inland Empire has left some landlords scrambling.

Tenants in the I.E., the Western U.S.’ most active warehouse and logistics hub, have vacated 4 million square feet more than they moved into in the second quarter, according to CoStar. That marks one of the biggest quarterly occupancy losses of any industrial market in the country last quarter.

As it stands, the I.E.’s industrial vacancy rate is at a 15-year high of 8.5 percent, according to CoStar, above the nationwide industrial vacancy rate of 7.5 last quarter.

In response, landlords have begun offering rent concessions and focusing on lease renewals and marketing attractive top-tier properties.

The sharp increase in vacancy “presents an interesting dilemma for landlords,” Monique Snowden, vice president of asset management at CapRock Partners, told CoStar. CapRock owns 35 industrial properties in the region. Some landlords could consider “elevated tenant credit risk” to fill space while others could negotiate cheaper rents when renewing existing tenants’ leases, Snowden said.

It’’s not all doom and gloom in the I.E. industrial sector, though.

Dedeaux Properties, which owns and manages 14 million square feet in the region, recently locked down a full 165,000-square-foot warehouse lease in Fontana with logistics firm Pilot Air Freight. Last week, IDC Logistics leased nearly 1 million square feet in one of the I.E.’s largest industrial leases of the year so far.

“We recognize we’re in a slow leasing environment,” Alex Filler, senior director of investments at Dedeaux, said. “But even with all the macro items in the background, we were able to lease at market rates and get really-good-credit tenants into our buildings.” He added that hesitant tenants are “waiting on interest rates, watching consumer spending and tariffs.”

An increase in warehouse and logistics facility construction during the pandemic could be to blame for the current lack of demand to fill the space.

“Much of the current rise in vacancies is a correction from the pandemic-era demand surge and record-breaking construction deliveries,” Snowden said. “This cycle will take time to work through, but I have no doubts about the resilience in the Inland Empire.”

— Chris Malone Méndez