Lee & Associates Riverside Releases 1st Quarter 2020 Industrial Market Summary
Lee & Associates, a nationwide leader in commercial real estate services, releases its first quarter 2020 industrial market report for manufacturing and distribution buildings in the East Valley market of Southern California’s Inland Empire.
The first quarter of 2020 posted strong activity and gross absorption. Gross absorption for 2019 totaled 21.2 million SF, continuing on the heels of the record-breaking absorption performance in 2018 of 27.3 million SF, and historically in 2017 of 16.9 million SF and 2016 of 19.3 million SF. Gross activity in the first quarter was 14.9 million SF, with investment purchases and lease renewals accounting for 64.0% of the total.
The report, which was prepared by Caroline Payan, director of marketing and research in Lee’s Riverside office, found that The start of the 1st quarter in 2020 was a continuation of consistently strong activity, good absorption and low vacancy in all size sectors much like 2019. Development projects continued to plow forward, and owner-users and investors continued to take advantage of record-low interest rates, absorbing properties in all size ranges. This all came to a halt in the beginning of March with the onslaught of Covid-19 and local and state “Stay at Home” orders.
Most manufacturing and distribution operations had to immediately change the way they do business, which temporarily caused many commercial real estate transactions to be put on hold as owner-users and investors regrouped to see what was next. This “wait and see” approach is expected to continue through the 2nd quarter of 2020. Nonetheless, the Inland Empire industrial sector has been the least impacted commercial sector as companies have quickly rallied and some are thriving as they take advantage of current needs.
The world has changed and everyone in the supply chain is reacting. There will be winners and losers, but the Inland Empire is primed for a strong recovery as our market hosts many of the national companies that provide products to the nation. These companies are now all hiring to keep up with increased demand for their products.
Despite the unknowns related to when we will “flatten the curve” as a country, there’s room for optimism in the Inland Empire industrial sector because the Fed has clearly made a commitment to keep interest rates low and there is plenty of pent-up demand to drive a bounce back as many expect in the second half of 2020.
Vacancy rates decreased in the first quarter to 4.28%. The remainder of 2020 is projected to show an overall stable vacancy rate, although it may rise given a projected increase in new supply and the looming impacts of the current pandemic. Nonetheless, large big-box distribution space continues to be in high demand with many companies continuing to move east to take advantage of lower sale prices and lease rates as compared to areas closer to the Ports of Los Angeles and Long Beach.
The base for the first quarter represented 10.8 million SF under construction, with 67.1% of the total in the 200,000+ SF range, a 10.0% increase over the previous quarter. There were 12 new buildings that completed construction in the East Valley in the first quarter encompassing 2.85 million SF, with 22 new buildings projected to be completed in the second quarter of 2020 totaling 4.1 million SF.
Average asking sales prices per SF increased in the first quarter to $141.15/SF with the supply of buildings offered for sale remaining limited. Asking GRS rates increased to $0.74/SF over the previous quarter as did asking NNN rates which averaged $0.70/SF. Both actual GRS and NNN rates decreased over the previous quarter while actual sale prices per SF at $149.40/SF increased 7.4% over the previous quarter.
Lee & Associates Riverside president, Dwight Hotchkiss, stated that “2020 was shaping up to be another banner year for the Inland Empire industrial market; and the first two months had good results. March arrived as did the Covid-19, and it has brought with it a slow down due to the Safe at Home mandate. The short-term effect of this is a disruption is businesses pausing on leasing or expansion plans. The long-term effect is a potential huge win for industrial, as on-line sales have skyrocketed in March. There will be increased demand for last mile warehouses to accommodate the expected long-term growth in on-line shopping.”
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