Inland Empire retail should be more of the same in 2019

With the economy strong and people spending, the local retail market should be strong, but probably not spectacular, next year.

If its third quarter performance is any indication, the Inland Empire’s retail market will be strong as it enters 2019.

Net absorption in July, August and September was more than 327,000 square feet, up from the third quarter of 2018 according to CBRE’s third quarter report.

Construction totaled 621,000 square feet, also a year-over-year increase, vacancy fell to 8.5 percent and lease rates averaged $2.05 cents a square foot, also an increase compared with one year earlier.

Of those numbers, only the vacancy is cause for concern. Most brokers prefer a vacancy rate of no more than five percent, but CBRE was so impressed with the market’s recent performance that it all but declared a new era underway.

“A long-held belief that the Inland Empire is nothing more than a tertiary market compared with its Los Angeles and Orange County neighbors is coming to an end,” the report states. “The arid climate and spartan landscape once left little to be desired [but] vacant land has given way to sprawling residential developments, [and] a thriving warehousing and e-commerce scene propels employment gains higher than ever.

“An influx of new, youthful residents are hungry for trendy retail—and the Inland Empire is eager to oblige.”

The report records several of the larger retail transactions that were completed in Riverside and San Bernardino counties during the third quarter, including the 107,775-square-foot City Center Plaza and the 72,673-square-foot Metro on Main, both in Fontana.

The only negative in the report was the Low Desert region, which posted a net occupancy loss of more than 173,600 square feet during the third quarter, the only Inland submarket to post such a loss.

The closing of 174,000-square-foot Target at the Showcase at Indio accounted for much of the drop, the report stated.

Despite that glitch, the Inland retail market is in excellent shape – maybe as strong as it can be – heading into 2019, said Jerry Holdner, research director for Kidder Mathews, an Irvine commercial real estate firm with multiple Southern California properties.

“Existing properties are being absorbed, and so are the properties that are being built, and I think 2019 is going to be more of the same,” Holdner said. “Absorption will continue to be positive, and lease rates will level off. I expect 2019 to be solid, and consistent with what happened this year.”

Retail vacancy will be about 6.7 percent by the end of next year, roughly a two-point drop from where it was in the third quarter, and lease rates will average about $1.72  per square foot, Holdner predicted.

About 1.2 million square feet of retail space is being built now in Riverside and San Bernardino counties, Next year at this time, that number probably will be slightly lower, Holdner predicted.

“I get a sense that a lot of developers are getting nervous about the economy,” said Holdner. “I’m not talking about a major drop in construction, maybe down to one million square feet, but there will still be a decline.”

But the Inland Empire will get more retail construction in 2019, and beyond if it’s population continues to grow, said Brian McDonald, first vice president with CBRE Ontario.

“If people keep moving here because they can’t afford to live in Los Angeles and Orange counties then Inland Empire will continue to attract more retail, especially on the east end,” McDonald said.

Retail lease rates should rise slightly due to increased demand, and more restaurants should open for business in the two-county region next year, McDonald said.

“I know some people are getting nervous because we’ve had 10 years of economic expansion and they think we’re overdue for a slowdown, but we aren’t seeing any signs of that happening,’’ McDonald said. “The economy is strong, people are working and consumer confidence is up.”

Leasing in the local retail sector may go up slightly in 2019, said Carol Plowman, senior vice president with Lee & Associates Riverside.

“There will be a little more leasing but it won’t be a frenzy like it was before,” Plowman said. “I think vacancy and rental rates will be flat, and if rents do go up we may see resistance from some retailers. No one wants to pay high rents.

“I expect to see more activity next year, but retailers might be a little more selective about where they locate.”

Brick-and-mortar retail’s battle to survive against the onslaught of e-commerce will continue to be a major retail trend in the Inland Empire, just as it will be everywhere else, according to Plowman.

“Amazon is knocking the socks of of everyone,” Plowman said.