The Inland Empire, one of Southern California’s most vital logistics hubs, has long been a bellwether for the industrial real estate market. However, in Q3 2024, the region is experiencing a period of transformation, with market dynamics shifting due to rising vacancies, slowing construction, and declining rents, according to a recent Q3 2024 report by Savills. These changes are not entirely unexpected as the post-pandemic economy normalizes and the industrial sector recalibrates.
A Market in Transition
Inland Empire’s industrial inventory expanded significantly over the past year, growing by 36.3 million square feet to a total of 619.5 million square feet. This surge in supply has outpaced demand, leading to a sharp increase in vacancy rates. The vacancy rate climbed to 9 percent in Q3 2024, up from just 5.2 percent a year earlier—a 380-basis-point jump. The uptick was driven by a combination of new construction deliveries and an influx of sublease space, particularly in buildings ranging from 100,000 to 500,000 square feet.
Despite these challenges, the region’s role as a critical logistics hub remains intact. Many tenants, particularly in logistics and e-commerce, have continued to expand their footprints, albeit at a slower pace than in prior years.
Softening Rental Rates
A notable trend in Q3 2024 was the decline in asking rental rates. Monthly rents dropped by 13.7 percent year-over-year to $1.20 per square foot on a triple-net (NNN) basis. While this decline reflects the market’s adjustment to softer demand and increased supply, it is important to note that current rents are still 76 percent higher than pre-pandemic levels.
Landlords are adapting to the changing conditions by offering increased concessions, including reduced rents and tenant improvement allowances, to maintain occupancy levels. These measures highlight a shift to a more tenant-favorable market, providing opportunities for occupiers to secure competitive lease terms.
Leasing Activity Concentrated in IE West
Inland Empire’s industrial market saw significant leasing activity in Q3 2024, led by major tenants in logistics and e-commerce. Notable deals included Western Post securing two leases totaling over 1.5 million square feet across Inland Empire East and Inland Empire West, with 927,969 square feet in Inland Empire East at 1979 W Renaissance Parkway and 577,905 square feet in Inland Empire West at 13277 San Bernardino Avenue. eFulfillment Services subleased 1,101,840 square feet in Inland Empire East at 17820 Slover Avenue, while Lecangs, LLC expanded its presence with a 503,595-square-foot lease in Inland Empire West at 2200 Opportunity Way. HYTS Logistics also signed a new lease for 484,240 square feet in Inland Empire West at 13230 San Bernardino Avenue, highlighting the region’s continued appeal to high-demand industries.
Overall, leasing volume in Inland Empire West was approximately 1.5 million square feet higher than in Inland Empire East, reinforcing the submarket’s position as the region’s primary industrial hotspot. However, the availability of sublease space, which peaked last quarter at 18.5 million square feet, remains unchanged, indicating potential headwinds as more space comes online.
A Slower Construction Pipeline
The pace of new construction in the Inland Empire has slowed considerably. In Q3 2024, the region had 8.7 million square feet of industrial space under construction—a 23.3 percent year-over-year decline. Additionally, only 5.5 million square feet of new space was delivered during the quarter, compared to 9.6 million square feet in Q3 2023. This slowdown reflects developers’ caution as they navigate a market with rising vacancies and softening rents.
Key Sales Transactions
The Inland Empire industrial market saw robust investment activity in Q3 2024, highlighted by several significant sales. Stockbridge Capital Group acquired a 183,030-square-foot property in Inland Empire East at 7250 Cajon Blvd for $168.3 million ($919 per square foot), setting a record price per square foot. In Inland Empire West, Cabot Properties purchased a 236,129-square-foot facility at 8300 Almeria Avenue for $76.8 million ($325 per square foot), while Warehouse Specialists acquired 209,700 square feet at 14339 Whittram Avenue for $58.7 million ($280 per square foot). Other notable transactions included TA Realty’s $35.5 million acquisition of a 106,212-square-foot property at 717 W State Street ($334 per square foot) and F&S Food’s $30.9 million purchase of a 128,000-square-foot facility at 1730 Eastridge Avenue ($242 per square foot) in Inland Empire East. These deals underscore sustained investor confidence in the region’s industrial assets.
Looking Ahead
As 2024 progresses, the Inland Empire industrial market is likely to face further challenges. Vacancy rates are expected to continue rising, driven by new construction deliveries and sustained sublease availability. However, the region’s strategic location near the Ports of Los Angeles and Long Beach ensures its enduring importance to logistics and distribution networks. Recent labor disruptions on the East and Gulf Coasts have also redirected some activity back to Southern California, narrowing the competitive gap between ports.
The current market presents tenants with an opportunity to negotiate favorable lease terms in a landscape that has shifted to their advantage. For landlords and developers, the focus will likely remain on maintaining occupancy and aligning new projects with tenants’ evolving needs.
