Inland Empire Industrial Reaches A Crossroads As Leasing Shifts North

When it comes to huge industrial spaces, the Inland Empire still reigns supreme, with big-name companies leasing up swaths of space that can top 1M SF. But overall, the desert market is a bit sluggish as it works its way through a backlog of inventory.

The market’s overall vacancy rate in the second quarter was 6.7%, a marginal increase over the first quarter and roughly in line with the same period last year, according to CBRE.

“We're in a recovery phase,” CBRE Senior Managing Director Ian Britton said. 

There is also nuance between the varying regions of the Inland Empire. 

The Inland Empire’s east and west regions, which make up the core of the market, posted negative net absorption of 740K SF in the second quarter. 

A few large deals in the northern Inland Empire, which includes industrial hot spots Victorville, Hesperia and Apple Valley, pushed absorption there solidly into positive territory with 2.3M SF leased on a net basis. 

Overall, the market posted 1.6M SF of positive net absorption, according to CBRE. 

Notable transactions were move-ins at a 1.3M SF warehouse for Goodyear tires and a 1M SF lease signed by an unnamed logistics user in Hesperia for previously vacant space, according to CBRE. Because the footprints are so large, it is possible for just a handful of them to skew the numbers in either direction. 

Development and larger-tenant activity are moving north toward the high desert, Britton said, especially as the Inland Empire west has become a bit more built out. This shift has been underway for a couple of years. 

Of the 100 largest leases signed in the first half of this year nationwide, 14 were signed in the Inland Empire, according to a CBRE report released Monday. The Inland Empire accounted for the most leases and the greatest leasing volume of any market nationally. Those 14 leases totaled 9.8M SF, according to CBRE. 

Britton said that the flood of new supply that came online in the years following the pandemic warehouse demand spike is still working its way through the market and nudging the vacancy rate up in the process. At the same time, Britton said he is seeing some larger companies consolidate operations and move into newer facilities, leaving older space behind. 

Third-party logistics firms continue to be the most active occupiers in the Inland Empire. That is true nationally, too, with 3PLs signing 38 of the largest 100 leases across the country, according to CBRE.  

The majority of the vacancy in Q2 was in spaces between 250K SF and 500K SF, with a vacancy rate in that range of nearly 10%, Britton said. Those parcels were easier to entitle, resulting in a slightly overbuilt environment and corresponding higher vacancy, he said.  

One positive indicator Britton saw in the beginning of the year and into Q2 was that warehouse utilization rates rose as inventories grew. This was likely connected to companies seeking to import goods before new tariffs took effect. 

At least one big chunk of space was pulled off the sublease market as the trend emerged. Shein leased 1M SF in the Inland Empire next to an 800K SF warehouse it already occupies. 

“That's generally a good thing, when the inventory levels get higher,” Britton said. “That's when companies start expanding and need more space.”