Future Cities
2022 North America Industrial Big Box Review & Outlook: Inland Empire
March 11, 2022 5 Minute Read
Located 45 miles east of the ports of Los Angeles and Long Beach, the Inland Empire primarily consists of Class A, big-box distribution buildings. With excellent freeway access and proximity to the affluent consumer base of Southern California, the Inland Empire has been one of the most sought-after markets in the country by both suppliers and institutional investors. There typically are multiple qualified offers to lease available big-box space, resulting in a high volume of preleasing. This has led to a vacancy rate of less than 1% and quarterly increases in rental rates of 25% or more.
Demographics
Approximately 16 million people—26% in the 18-to-34 age demographic—live within 50 miles of the Inland Empire (IE) core, the second-highest population of markets in this report and with an expected growth rate of 2.2% over the next five years. Close to 30 million people live within 250 miles of the market, generating a significant amount of industrial demand. The IE is second in North America behind Northern/Central New Jersey in total households within a 50-mile radius of the market core (5.2 million).
Figure 1: Inland Empire Population Analysis
Source: CBRE Location Intelligence.
A big population gives the Inland Empire one of the largest big-box industrial labor forces in the country. According to CBRE Labor Analytics, nearly 102,000 people are employed in the warehouse industry. This number is expected to grow 18% by 2030. The average wage for a non-supervisory warehouse worker is $16.65 per hour. While this is 12% higher than the national average, it is the lowest hourly wage of any major industrial market in California.
Figure 2: Inland Empire Warehouse & Storage Labor Fundamentals
Source: CBRE Labor Analytics.
*Median wage (1 year experience); non-supervisory warehouse material handlers.
Location Incentives
Over the past five years, there have been 30 economic incentives deals totaling more than $39 million for an average of $13,463 per new job in the Inland Empire, according to Wavteq.
According to CBRE’s Location Incentives Group, among the top incentive programs offered in the Inland Empire is the California Competes Tax Credit, which is a discretionary income tax credit awarded to businesses that locate or expand in California. This program was extended through 2023 with $180 million in tax credits available for allocation to businesses that make capital investments, create new jobs and offer strategic importance to the region. The credits are non-refundable and companies can only apply during designated application periods held three times each year.
Figure 3: Inland Empire Top Incentive Programs
Source: CBRE Location Incentives Group.
Note: The extent, if any, of state and local incentive offerings depends on location and scope of the operation.
Logistics Driver
The market is close to the ports of Los Angeles and Long Beach, the two largest in North America. The massive flow of imports into these ports directly feeds the big-box distribution warehouses in the region.
The market has logistics advantages from the air, ground and rail. Ontario International is quickly becoming one of the top cargo airports in the country. According to Aviation Pros, air cargo volume into Ontario increased by 21% in 2020 (latest data available), the highest growth rate in the continental U.S. Ground transportation is a key to the market’s success. Interstates 10 and 15 give the region direct access to the entire country. Rail also is an option, as both BNSF and Union Pacific service the market.
The market is close to the ports of Los Angeles and Long Beach, the two largest in North America.
Capital Markets
2021 was another record year for the IE, making it one of the nation’s top industrial markets. Fully entitled land remains scarce and trades at a premium as developers look to add new supply. The boundaries of the East IE continue to push out to Beaumont, Banning, Hesperia and Victorville, and south to Menifee and Murrieta, as large land parcels become harder to find. Depending on the lease term and rental rate, cap rates compressed in 2021, with some deals trading in the sub-3% range. Another year of strong performance is expected in 2022, with continued rent growth, low vacancy rates, low interest rates, strong investor demand and lower cap rates.
Figure 4: Cap Rate Comparison
Source: CBRE National Partners.
Supply & Demand
With 371 million sq. ft. of total supply, the Inland Empire is the fifth largest big-box industrial market in North America. Leasing activity totaled 49.3 million sq. ft. last year, second only to Chicago in North America. Demand was driven by general retailers & wholesalers, along with 3PLs, that combined for 80% of 2021 leasing activity.
Despite strong demand, construction completions fell by 50% last year to 8.2 million sq. ft., as fewer land sites were available. Fewer completions and more leasing activity lowered the direct vacancy rate to a record-low 0.4% and increased taking rents 38% to $9.04 per sq. ft. per year. The lack of available land will keep the vacancy rate below 1% and rents rising. These robust fundamentals will lead to strong investor demand and will keep cap rates below 3% in 2022.
Figure 5: Share of 2021 Leasing Activity by Occupier Type
Note: Includes new leases and renewals 200,000 sq. ft. and above.
Source: CBRE Research.
Figure 6: Leasing Activity
Note: Includes new leases and renewals 200,000 sq. ft. and above.
Source: CBRE Research.
Figure 7: 2021 Construction Completions vs. Overall Net Absorption
Source: CBRE Research.
Figure 8: Direct Vacancy Rate by Size Range
Source: CBRE Research.
Figure 9: Under Construction & Percentage Preleased
Source: CBRE Research.
Figure 10: Historical First Year Taking Rents (psf/yr)
Note: Includes first year taking rents for leases 200,000 sq. ft. and above.
Source: CBRE Research.
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Contacts
Lic. 01014089
Lic. 0063911 (CA)
