COVID-19 takes a big bite out of the Inland office market

The market might manage a few small improvements in 2021, but don’t look for anything substantial until at least 2022.

COVID-19 hit every sector of the Inland Empire economy hard, and nowhere did it hit harder than the region’s office market.

Most of the numbers that determine whether a market sector is healthy were moving in the wrong direction as the third quarter came to a close, according to CBRE.

Office vacancy in Riverside and San Bernardino counties was 9.9 percent, up from 8.8 percent exactly one year earlier, CBRE reported.

Vacancy in the Inland Empire west and Inland Empire east was 8.2 percent and 10.9 percent, respectively.

IE west was the main source of occupancy losses—particularly Chino, which lost 31,139 square feet, Ontario, which dropped 38,785 square feet, and Rancho Cucamonga, which declined by 32,398 square feet.

Net absorption was minus 145,015 square feet, up from negative 106,239 square feet in the third quarter of 2019. CBRE blamed that trend on move-outs and downsizing, mostly by tenants in education and financial services.

Sales volume dropped 41 percent, from $62.9 million in the third quarter of 2019 to $37 million in the third quarter of this year.

The largest transaction in the third quarter of 2020 was the $16 million sale of Riverside Gateway at 3480 Vine St. Fully-leased, the 44,354-square-foot office building was sold to Boyd Watterson Asset Management. 

The second largest transaction was the sale of The Rincon, a new 31,726-square-foot medical office building, which changed hands in July for $12.2 million. Sold to a private entity, the building was fully leased at the time of sale.

Lease rates were the one area in which the Inland office market managed to improve: the average asking rate at the end of the third quarter was $2.11, up from $2.01 one year earlier. 

Even an event seven years in the making – development of a speculative office building- barely made a ripple in the market.

During the third quarter, construction was completed on Lakeshore Plaza, a 146,784-square-foot office building located on two acres within Dos Lagos, a high-end community in Corona. Brokers had been waiting for any Class-A office project to be built in the Inland Empire without a signed tenant. That would be the sign of a healthy market or a recovering one in the case of the IE.

But that project – which broke ground during the fourth quarter of 2019, well before the pandemic hit, and was completed in the third quarter of 2020 – didn’t inspire any imitators, and it’s not likely to do so now. When the quarter ended Sept. 30, not one office building, either speculative or build-to-suit, was under construction in either county.

Unfortunately, the Inland office market probably won’t perform a lot better in 2021 than it did in 2020, at least during the first half of the year, said Tom Pierik, a senior vice president with Lee & Associates Ontario and a specialist in office transactions.

Pierik predicts that vacancy and lease rates will stay within a point or two of their current levels during the next year and that no office buildings will be developed in the two-county region in 2021.

“I don’t think you’ll see much growth in the market until 2022,” Pierik said.

One result of the pandemic is more people working at home, which has created more office vacancies. This trend, much reported by the media, also has some in management concerned, according to one of the Inland Empire’s veteran office brokers.

“I’m hearing about this all of the time. They’re concerned about losing their office culture, which is important to a lot of businesses. Put it this way: you don’t create much synergy among workers, or come up with as many good ideas when you’re using Zoom all of the time.”

Rick Lazar, Vice President with Lee & Associates Riverside

Lazar predicted an increase in subleasing in the Inland office market, next year, much of it the result of the empty office space created by more people working out of their house. 

“I don’t see a big recovery in 2021,” Lazar said. “I see a very fluid market. Vacancy will be up five to seven percent from where it is now, and lease rates probably down a little bit. It will be a very challenging market.”  

Jerry Holdner, an economic consultant in Laguna Beach whose territory includes the Inland Empire, said high fees alone will make office construction difficult in 2021, but there could be some build-to-suit development.

Vacancy will probably be around seven percent, downtown Riverside will remain a relatively strong market and people will continue to work out of their house.

“I think the amount of people working at home could get to 25 percent,” Holdner said.