Industrial Firms Continued to Absorb Space in the Inland Empire at a very High Rate in 2011
By: Ronald J. Barbieri, Ph.D, CPA
One of the primary economic drivers of the Inland Empire and therefore the High Desert is the expansion of warehousing and distribution facilities as well as manufacturing operations in the Inland Empire. Such industrial operations provide Base Employment for the region which in turn generates Secondary Employment in other economic sectors of San Bernardino and Riverside Counties. Over 60,000 residents of the High Desert commute to the Los Angeles Basin for work. This represents approximately half the workforce of the High Desert. Hence, an increase in the demand for industrial space in the Inland Empire has a positive indirect effect on the High Desert.
Also, the absorption of industrial space in the Inland Empire would further reduce the limited supply of industrial land in the Los Angeles Basin. A study by John Husing dated August 2008 determined there were only 4,860 acres of land in the Los Angeles Basin portion of the Inland Empire that could be developed for industrial use. This number could be significantly reduced over the next few years, thereby reducing number of sites that are rail served or can accommodate the development of large industrial buildings. It will not be long before the very large industrial tenants or firms that require rail will have to locate in the High Desert or in the area along the I-10 Freeway in Banning, California; The migration of more industrial firms to the High Desert would create more Base Employment in the area, which in turn could generate additional Secondary Employment. This would lead to lower unemployment rates in the greater Victor Valley area.
There is 499 million Square Feet (SF) of industrial space in the Inland Empire. This is equivalent to half the inventory of industrial space in the greater Chicago area. Costar defines 482 million SF as Warehousing/Industrial space. The remaining 17 million SF is in smaller Industrial Flex space. The High Desert currently accounts for slightly over 4% of the total inventory; but in the intermediate term and beyond it is expected to be the primary expansion area for industrial development in the region. Southern California is home to almost 2.0 Billion SF of industrial space. Much of the increased demand for industrial space in the Inland Empire is attributed to firms relocating out of Los Angeles County in search of industrial sites on which to build larger, more efficient facilities. The vacancy rate for Warehousing/Industrial space in the Inland Empire has increased from 5.2% at the end of 2004 to 12.2% by the end of 2009. The increase in vacancy was the result of overbuilding rather than a decline in industrial demand. The vacancy rate at the end of the Fourth Quarter 2011 declined to 7.5%. Very little inventory was added in 2010 and 2011; but there was a substantial absorption of large box industrial space during that two year period. If the vacancy rate declined to 5% the industrial market in the Inland Empire would be in equilibrium. That could occur by 2013 if the developers do not build an excessive amount of inventory that is not preleased. Developers are beginning to build spec large box industrial space in the Los Angeles Basin.
There are a limited number of sites in the Los Angeles Basin that can accommodate large industrial boxes greater than 800,000 SF. Industrial tenants and users wanting larger facilities will have to locate either in the High Desert, Moreno Valley, or Banning California. The lack of larger industrial sites in the Los Angeles Basin could result in a substantial increase in the level of industrial development in the High Desert beginning as early as 2015.
In calendar year 2007 the Net Absorption of industrial space peaked at almost 27 million SF. In 2008 industrial demand increase by 4.6 million SF; but in 2009 the Net Absorption was a negative 400,000 SF. Net Absorption in the Inland Empire was a positive 12.1 million SF in 2010 and 15.0 million SF in 2011. A portion of the increase in Net Absorption was caused by the acceleration of demand due to relatively low rents compared to prior years. The increase in industrial demand in the Inland Empire in the last two years is substantial, especially in light of the slow economic recovery in both the U.S. and California. In fact the Inland Empire only experienced one year of negative industrial absorption during the last recession.
From 2005 through 2008 an average of 26.1 million SF of Warehousing/Industrial space was delivered annually in the Inland Empire. Deliveries declined to 7.0 million SF in 2009. Only 1.7 million SF was delivered in 2010; while 3.8 million SF was completed in 2011. The level of new construction has definitely increased in the last year. This limited level of construction coupled with the unanticipated increase in industrial absorption has resulted in the elimination of half of the Excess Vacancy in the market place.
The vacancy level was 22.1 million SF at the end of 2005. It peaked at 57.9 million SF by the end of 2009. As of the end of 2011 it had declined to 36.5 million SF. There is still an estimated 15 million SF of Excess Vacant space in the Inland Empire; but the industrial agents in the Los Angeles Basin are now reporting Excess Demand (no vacancy) for buildings of 500,000 SF and larger. Most of the vacancy is in the medium and smaller size buildings often occupied by small businesses that have not experienced much growth since the Great Recession.
Industrial agents are now suggesting there will be a new wave of construction for buildings larger than 500,000 Square Feet. When this is coupled with the fact there are only 4 sites in the Los Angeles Basis that can accommodate a building greater than 800,000 SF it is logical to conclude it will not be long before the High Desert will be able to successfully compete for the larger warehousing and distribution tenants. A higher level of industrial development will occur in the High Desert, though the timing is uncertain, and unfortunately very much a function of public policy that will be determined in Washington and in Sacramento, California.
In spite of all the political and economic uncertainty the big box industrial market in the High Desert is likely to add one or more users each year for the next few years before the increase in demand accelerates in the second half of this decade. This will probably be the case because large industrial users will continue to relocate from Los Angeles County to the Inland Empire in order to build larger, more efficient facilities. As the availability of large industrial sites in the Inland Empire diminishes those seeking larger sites will have no choice but to locate in the area of Banning, California or in the High Desert. Only an economic depression would defer this from happening.
All the inventory, absorption, and construction information contained in this article was obtained from reports The Bradco Companies generated from Costar. These numbers are deemed to be accurate by real estate industry standards; but they are not exact and subject to change.