Inland industrial market will only get stronger in 2014

E-commerce and a healthier job market will help the market, which is expected to add 60 million square feet of space next year, according to brokers.

Don’t look for the Inland Empire’s industrial market to slow down next year.

If anything, the region’s industrial sector could get even hotter than it’s been during the past few years, when it’s been the one bright spot for a market that’s otherwise been mired in recession, according to several of the region’s prominent industrial real estate brokers.

“I think we’re looking at a solid 2014,” said Paul Earnhart, senior vice president with Lee & Associates Ontario and a specialist in “big-box” warehouse-distribution projects of 500,000 square feet or more.

Earnhart, who is in charge of a team of industrial brokers at Lee & Associates that bears his name – “Team Earnhart” – is bullish on the Inland region’s industrial market, which emerged from the recession relatively quickly and provided jobs for the region while its housing and office markets floundered.

He’s predicting more sales, more leases and more construction, even a resurgence of projects in the range of 300,000 square feet, the result of industrial space becoming scarce, especially on the west side.

Thanks mainly to e-commerce, large logistics projects in the Inland Empire aren’t going away, according to Earnhart.

In October, Amazon.com announced it will build a fulfillment center in Moreno Valley, a project that will cover 1.2 million square feet. Since 2012, the online retail giant has operated a one million square foot fulfillment center in San Bernardino that employs 1,400 people.

Those projects, which deliver goods to shoppers the day the items are ordered online, will only get bigger, according to Earnhart.

“That trend is here to stay, and it’s not just Amazon or the other online retailers that are driving it,” Earnhart said. “Home Depot and a lot of the larger retailers are heading in that direction too.”

“There’s going to be a lot of useful activity on both the east and the west side, with rents and [sale] prices moving up,” Earnart continued. “We should have a healthy year.”.

About 60 million square feet of speculative industrial space is under construction in Riverside and San Bernardino counties, with much of that expected to hit the market in 2014, according to the Inland chapter of NAIOP, the national commercial real estate trade association.

Two industrial projects that are expected to be completed next year will cover two million square feet each: Empire Gateway in Chino and Watson Commerce Center in Redlands, according to NAIOP.

“I think everyone is impressed with the number of projects out there,” said Robert Evans, executive director of NAIOP Inland Empire in November, shortly after the association’s annual bus tour of industrial properties in the two-county region. “There’s a lot of activity compared with a few years ago.”

Sixty million square feet is a lot of industrial product for any market to absorb in one year, even if the market is the Inland Empire, the unofficial warehouse-distribution headquarters of the western United States.

If most of that new space sells or leases, then the Inland industrial market would get even hotter than it’s been during the past several years. Vacancy rates would drop and lease and sale rates would rise.

But if enough of that space doesn’t sell or lease, the result could be a real estate bubble similar to the one that sunk the housing market in 2007-’08, with vacancy, sales and lease rates all heading in the wrong direction.

After the NAIOP bus tour, Ryan Velasquez, an associate director with Cushman & Wakefield Ontario, expressed some concern about where the Inland industrial market might end up in 2014.

Velasquez, a guide on one of the buses that toured the west end, noted that many of the projects expected to come online next year in Riverside and San Bernardino counties are 500,000 square feet and larger, and that there are few potential buyers, or tenants, for projects that large.

But Velasquez appears to be in the minority with those concerns.

“I’ve worked in the Inland Empire for 30 years, and I don’t see any signs of a bubble right now,” said Chuck Belden, executive director of Cushman & Wakefield’s Inland Empire office in Ontario. “Maybe there are some people who are concerned, but I don’t see it coming.”

Belden predicted that 2013 will “finish strong,” and that the momentum from this year will carry over into next year, which ultimately should be even stronger than last year.

“The job market will get better, and that will help the industrial market,” Belden said. “More ground will be broken on the east side because that’s where the space is. The west end is still more desirable for most developers because its closer to the ports, but it’s also running out of space.”

Demand might be strong enough next year to drive up lease rates several percentage points, and the e-commerce sector will only get stronger, Belden said.

“Fulfillment centers alone will keep the big-box [sector] in business,” said Belden, who deals mostly in industrial projects half a million square feet and larger. “We’re going to see more e-commerce come into the market next year than we saw during the past three years.”

The Inland region’s recovering housing market could have a major impact on the region’s industrial market, said Rick Lazar, senior vice president for Coldwell Banker Commercial Sudweeks Group in Redlands.

More housing construction would mean more housing contractors and sub-contractors would need space, and that could lead to a revival in smaller industrial projects, something the Inland market lacks, Lazar said.

“All of the air conditioning people, the electricians, the roofers, the cabinet makers would all need places to store stuff,” Lazar said. “That could lead to a demand for industrial space in the 10,000 to 25,000 square foot range, and that would be a wonderful thing because the market is woefully inadequate in that area. Look for it and you won’t find it, because it isn’t there.”

Otherwise, industrial vacancy rates probably will stay in the five to seven percent range, while most new development will continue to migrate east toward Moreno Valley and Hemet, Lazar said.

“Some of those larger projects on the west end are a dying breed,” Lazar said. “There’s no land for them anymore.”