IE Business Daily Business news for the Inland Empire.
Maybe the Inland Empire office market turned a corner during the third quarter of this year.
If it did, it could be a sign of good things to come as the market – which took a beating during the pandemic but appears to have bounced back – moves into 2024.
The Inland Empire office sector “showed its resilience” and “turned positive” during July, August, and September of 2023, with lower vacancy, positive net absorption, and increased lease rates, according to CBRE.
With those three categories moving in the right direction, the Inland office market should at least get off to a decent start in 2024 and probably perform well from there, said Rick Lazar, senior vice president with Lee & Associates Redlands.
“I think it will do OK,” said Lazar, a long-time office and industrial broker in the Inland region. “I worry about [losing tenants to] Los Angeles, which has a 60 to 70 percent occupancy rate.” Lease rates will continue to go up in 2024, making the Inland market more of a landlords’ market than it already is, according to Lazar.
Absorption will also stay up, but there probably won’t be much construction – build-to-suit or speculative – in 2024, Lazar predicted.
“We’ve seen a lot of consolidation of space in the last three years and I expect to see that continue,” Lazar said. “Right now, there are a lot of markets – Redlands being one – where it’s hard to find space right.”
A relatively recent trend – businesses buying office buildings instead of leasing them – should continue in 2024.
Such transactions, often financed by loans from the U.S. Small Business Administration, are becoming more common, according to Lazar.
“We’re seeing that a lot,” Lazar said. “Market conditions have driven down the price of buildings, and there aren’t a lot of big tenants out there to fill the space. So it can make sense for both parties – it’s a great investment for the buyer – but it does take the building off the lease market.
“But If you can get a 25-year loan from the SBA, it’s a fabulous deal.”
If Lazar’s forecasts are accurate, the Inland office market in 2024 will perform much like it did in the second half of 2024: solid, with some improvement in most categories, but nothing spectacular, and still vulnerable to an economic downturn.
Office vacancy during the third quarter in Riverside and San Bernardino counties was 9.4 percent, only a slight decrease from the third quarter of 2022 but still moving in the right direction. Most of that decline happened on the east side – which includes Riverside, Redlands, Moreno Valley, and Colton – where vacancy went from 10.3 percent in the third quarter of 2022 to 9.8 percent during the third quarter this year.
Net absorption was 25,935 square feet in the third quarter – and close to 100,000 square feet during the first nine months of the year – a sign that tenants continued to move despite concerns about the economy.
Net absorption remained high in Riverside and San Bernardino, two of the Inland region’s largest office submarkets: 27,141 square feet and 39,000 square feet, respectively.
The Inland Empire East absorbed 62,410 square feet of office space in the third quarter, a number that was offset by negative absorption of 36,863 square feet on the west end, according to CBRE.
The two-county market recorded several noteworthy lease transactions during the third quarter, including 44,000 square feet leased by Vantage Medical Group in Corona, 23,765 by ABI Document Support Services in Loma Linda, and 12,330 square feet by KWC Engineers Inc., also in Loma Linda.
“The Inland Empire office market will likely continue to deviate from the national trend of higher vacancies and large negative net absorption,” CBRE’s third quarter Inland office report states. “The region has strong market fundamentals, driven primarily by the high influx of government-related and healthcare-related businesses.”
One Inland broker said he agrees with that assessment.
“I think 2024 will be a good year,” said Tom Pierik, senior vice president and an office specialist with Lee & Associates Riverside. “We will have a low vacancy, and I think it will be a better market for the landlords than the tenants. Also, people are going back to the office in greater numbers, and that will help the market. COVID isn’t completely in the rearview mirror, but it’s a lot further back than it was.”
