Q2 2024 Industrial Market Outlook – Inland Empire
MARKET OVERVIEW
In Q2 2024, the industrial vacancy rate in the Inland Empire reached 7.2%, rising by 20 basis points quarter-over-quarter and increasing by 330 basis points year-over-year. Over the past two quarters, the Inland Empire added approximately 14.2 million square feet of completed construction to the market, while net absorption, though positive, only registered about 3.2 million square feet during the same timeframe. This indicates a shift in the industrial market’s trajectory. While the rate of completed construction increased by 14.8% year-to-date compared to mid-year 2023, it marked a 9.0% decline quarter-over-quarter, signaling fewer construction starts as the pipeline for warehouse space begins to descend from the demand spurred by e-commerce’s once urgent need for capacity. The amount of industrial space under construction decreased by 48.6% compared to last year and dropped 15.6% from the prior quarter. The once strong rent growth, the primary driver for new construction, has now begun a noticeable descent, with the average asking rent in Q2 dropping by 6.6% from the previous year to $1.28/SF triple net, down 3.0% from Q1 2024.
TRENDS TO WATCH
Shrinking lease and sale velocity will present a challenge while providing the impetus for working out deals. The increase in warehousing options will drive the leasing market as companies seek flexible solutions to meet evolving demand. Excess sublease space will continue to seek backfill opportunities. The amount of vacant sublease space on the market increased by a modest 1.8% from Q1 2024, but it remains 214% higher than Q2 2023, totaling approximately 13.1 million square feet—a new all-time high. While cargo flow through the ports keeps pace, the abundance of industrial space offers numerous options for warehousing requirements. According to the latest figures from the Ports of Los Angeles and Long Beach, inbound loaded TEU cargo volumes—a significant driver of warehouse space demand in the Inland Empire—increased by 17% year-to-date as of May 2024. While the rate of growth is expected to slow, prices will continue to descend as interest rates remain elevated, affecting industrial building sales, though quality space still commands a premium. Sales dollar volume increased by 122% quarter-over-quarter, but the year-to-date total is down 42.8% from last year’s figure. The median sale price per square foot at $287, compared to the average, registered a higher year-over-year increase of 15.3% and a 14.7% quarter-over-quarter rise, reflecting the market’s impact of fluctuating sales volume and prices. The combination of elevated interest rates and slowing demand will continue to exert downward pressure on pricing heading into the second half of the year, as opportunities are seized in the marketplace.
