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Looking for the High-Rent District? Think Warehouses

The hottest real estate commanding some of the greatest surges in rents don’t have infinity pools or nice city views. Instead, they offer abundant cubic square footage, good loading dock clearance and access to major freeway arterials.

Warehouse rents are climbing amid a supply-demand imbalance for space that’s left the country with the lowest industrial vacancy rate in the nation’s history as retailers, clothing manufacturers and others clamor for square footage that will help accommodate growing inventories, faster delivery and the last mile. Nowhere is that more apparent than in Southern California’s Inland Empire, a region consisting of cities in Riverside and San Bernardino counties located east of Los Angeles.

“We are in an ever-increasing e-commerce-driven world. Consumer behavior is only shifting more and more towards e-commerce, which means more and more warehouses need to be built to fuel that demand, which means more and more trucks on the road,” said Nicholas Chang, an executive vice president in the Ontario office of real estate brokerage NAI Capital.

Real estate firm JLL reported fourth-quarter rents in the Inland Empire climbed 59.6 percent from the year-ago period. The vacancy rate, or amount of available industrial space, fell to 0.6 percent in the quarter, making the region the hardest to find available space in the U.S.

“My personal opinion is we will see at least another 25 percent increase in rent, or more, in the next 12 months, no question in my mind,” Chang said.

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That’s about in line with the sentiment of JLL’s report suggesting retailers, brands and other warehouse users can expect more of the same this year when it comes to finding available warehouses and distribution centers.

“Developers and occupiers will be forced to be creative as both navigate a market with no supply and insatiable demand,” the JLL market report on the Inland Empire said.

Companies have long relied on the Inland Empire as a staging ground for their goods, moving product off container ships and driving them to big box warehouses to sort, pack and move to customers in the region or other parts of the country.

“The Inland Empire is one of the largest and most dynamic markets in the country naturally because of our proximity to the port of L.A. and Long Beach, “ Chang said. “The Inland Empire market services both Southern California, the Western seven-state region and nationally.”

Amazon Fulfillment Center
Inside the Amazon fulfillment center in San Bernardino. AP Photo/David McNew

Amazon.com Inc. saw the value in the area with the e-commerce company the largest private employer there with more than 30 facilities.

Other companies that have warehouse space out there include Zara, Nordstrom, Ross Stores, QVC, Target and Walmart to name a few.

Chang said he’s seeing interest across the spectrum when it comes to companies’ warehouse size requirements.

“There’s high user demand in all size classes, from 5,000 square feet up to 1.5 million square feet,” he said. “Southern California has such a robust industrial warehouse market that we see all users and all size classes absorbing space.”

With demand at an all-time high amid e-commerce growth and delivery timetables shortening, industrial real estate is entering a golden era for rents.

Logistics real estate is short and we are not going back to an era where real estate will be cheap and expensing can be done easily,” McKinsey & Co. Partner Ludwig Hausmann said during a panel at the Manifest logistics conference in Las Vegas last week. “Warehousing automation is something that will pick up. Logistics real estate at some point will be as precious as high street retail one day.”

Executive after executive referenced the warehousing shortage during the three-day conference, which saw executives from across the logistics industry converge with tech start-ups.

“When you’re entering 2022 with the lowest possible vacancy environment and such a competitive environment for space, it is definitely going to add more pressure on rents,” Mehtab Randhawa, senior director of industrial research at real estate brokerage firm JLL, told Sourcing Journal.

Randhawa said the supply-demand imbalance in the broader United States will neutralize some. However, at least in the near term, rents are expected to continue their trajectory. The current environment, Randhawa pointed out, is years in the making.

“It did not happen overnight. It’s been happening over the last 10 years. It’s an acceleration of demand,” Randhawa said. “So, the demand that we would have seen spread out over three to five years just got compressed within a period of 12 months that’s led to the situation that we are in today and also the supply chain disruption played a big part of it.”

Back in the Inland Empire, NAI Capital’s Chang said it’s not just one factor that’s causing the warehouse shortage. Yes, consumers want goods faster, despite supply chain challenges, he said. New industrial development is also taking longer to receive project approvals as concerns over the impact of the trucking industry and emissions grows.

Some Inland Empire cities have imposed moratoriums or other restrictions on industrial development. The Chino City Council approved a 45-day ban on industrial development in October. Colton stopped development of new industrial through May. Riverside in 2020 implemented a 45-day moratorium for its Northside area. Jurupa Valley did the same 45-day ban last year on “truck-intensive” projects.

“From the moment a developer makes an offer on a piece of land to having a warehouse available for occupancy, it’s now over two years. When I started in the industry 17 years ago it was typically less than nine months,” Chang said.

Even with the warehouse shortage, the broker is upbeat on the region. He is, after all, in the catbird seat with plenty of companies looking to brokers to help them find space.

Tenants in the Inland Empire were on the hunt for some 40 million square feet of industrial in the fourth quarter, JLL said.

“Southern California,” Chang said, “is always, I think, still going to be a very viable market, despite our insanely increasing rental rates. No matter how much the rent goes up, it’s still only a fraction of a company’s overall expenditure.”