With 11.6M SF of industrial space under construction in Q3, the market’s supply of new space has been steadily falling over the last several quarters. A host of market and political forces has been applying downward pressure to new construction, which is bottoming out as the broader economy approaches a potential turning point.
“The whole process is just exponentially more expensive,” said Ian Britton, managing director and a regional leader for the Inland Empire. “It’s really tough for investors and developers to put land into production in a market that has so much standing inventory, a lot of which is good-quality space.”
Industrial construction in the region has taken a steep tumble since the third quarter of 2023, when slightly more than 30M SF was under construction in the Inland Empire, according to Inland Empire Industrial Figures Q3 2024. The area saw a dramatic run-up in new construction in the wake of the pandemic, leading to a historic level of new building. That high-water mark contributed to the steep drop, but other variables are at play, keeping new projects from replacing those recently completed.
Vacancy, meanwhile, has climbed from just over 3% to 6.8% in the last year. Sluggish tenant demand following an early-pandemic leasing frenzy is among the top causes of the slowdown. Add to that extra supply the higher borrowing, carrying and construction costs that are generally present for commercial real estate at large, and it is easy to understand why the Inland Empire is slowing.
“Everything’s just been frozen,” Scannell Properties Director of Development Jay Tanjuan said.
Tanjuan is overseeing a project in the Inland Empire that recently received entitlements. But instead of moving into the construction phase, Tanjuan said the firm is tracking the market closely and has given a one-year extension on the lease of the tenant occupying the building that will eventually be razed to make way for the new industrial project. “We have time to make a decision there,” Tanjuan said. “Ideally, we’d like to see some rent growth, some more tenant demand and some more [leasing] activity. Those will be good indicators that it’s the right time [to begin construction].” Scannell isn’t alone in waiting to break ground on new space. Developers only broke ground on 1.3M SF of industrial space in Q3, and 2.9M SF delivered in the same period across the market.
Another factor holding back development is uncertainty surrounding a host of temporary moratoriums on warehouse construction, rules aimed at tracking emissions of warehouse users, and restrictions on where these buildings can be constructed. The most recent effort at regulating warehouses to ruffle CRE is Assembly Bill 98, a state measure to control, among other things, where new warehouses can be built in relation to homes and schools. NAIOP SoCal President Tim Jemal said that this latest bill is different from previous interventions that have had an impact on the industrial real estate industry in that it isn’t yet clear how this new bill will affect future development. “We still don’t know the negative impacts that this bill will have on the logistics industry and warehousing and goods movement in California because we were never given an opportunity to provide input on it,” Jemal said. NAIOP is part of a coalition that includes the California Business Properties Association studying those potential impacts and seeking to mitigate them through future legislation.
Despite the various challenges, the market’s proximity to a major population center and busy shipping hubs at the Ports of LA and Long Beach mean the slowdown will almost certainly be temporary. Tanjuan looked toward 2026 with the expectation that at least by then, the market would be different. And he was bullish on the long-term health of the market, for all the reasons that have traditionally made it a powerhouse. The questions is, how long will this downslide last. “There’s a lot to like about Southern California industrial in the long term, but obviously we’re going through a period right now,” Tanjuan said.
Source: https://www.bisnow.com/los-angeles/news/industrial/q3-2024-inland-empire-industrial-real-estate-construction-126230, https://mktgdocs.cbre.com/2299/c832cc20-4d98-466c-adb2-8d44f69e2bcc-93041097/v032024/inland-empire-industrial-figures-q3-2024.pdf, https://x.com/bcccontracting/status/1170072393898852352/photo/3
