Inland office market should perform well in 2025

Based on its performance this year, there’s reason to be optimistic about the Inland Empire office market in 2025.

Two of its most critical categories, vacancy and absorption, both moved in the right direction during the third quarter, according to CBRE.

The two-county region recorded an eight percent office vacancy rate, down from 8.5 percent in the second quarter, and it absorbed 60,548 feet of space, also up month-over-month, CBRE reported.

There were no office builds under construction in Riverside or San Bernardino counties as the third quarter ended, and the average lease rate of $2.06 per square foot was down only one cent. That combination kept the level of office space stagnant.

But the Inland Empire has had almost no speculative office construction in more than 10 years at least, so the absence of any construction in 2024 was not a surprise.

So, with vacancy down, absorption up and lease rates essentially flat, the Inland office market – which was stopped cold by the Great Recession of 2008 and took another hit during the pandemic – appears to be in reasonably good shape heading into the new year.

“I think we’re a strong market,” said Rick Lazar, senior vice president with Lee & Associates Riverside and a commercial real estate broker in the Inland Empire for nearly 50 years. “We had an eight percent vacancy rate during the third quarter, which was one of the lowest in the country. That alone makes us a strong market.”

In fact, the Inland Empire had the lowest vacancy rate of any U.S. office market for five consecutive quarter as of the second quarter of this year, according to CBRE.

The Inland office market “held strong” by landing its share of government, healthcare and engineering office tenants during the immediate aftermath of the pandemic.

“The Inland Empire is an attractive choice for residents, investors, and those rethinking their office space needs nationwide, and the region is well-positioned to continue growing, CBRE stated in its second quarter report.

Lazar shares that optimism, predicting that 2025 could be the year that some version of speculative office development returns to the Inland region, although if it does happen it will be on a limited basis.

“I think there’s a possibility that we could see that,” Lazar said. “I’m not sure where it would happen, and it could be that the developer would want some part of the building to be leased before they start construction.

“That would make it only partially speculative, but I think the market is strong enough that that might happen.”

High construction costs – another reason Lazar doesn’t expect to see a lot new office buildings go up in the Inland region next year – would be the main reason a developer would make such a request.

“Building costs are sky high,” Lazar said. “They’re just too expensive. When I talk to contractors about putting up a new building, or even making tenant improvements, I nearly fall out of my chair when I hear now much those things cost.”

Leases and absorption should both continue to go up next year.

“I expect to see lease rates go up all over, but especially in San Bernardino, because I expect to see a lot of activity along Hospitality Lane,” Lazar said in reference to that city’s busiest commercial area. “Based strictly on supply and demand – in this case, not enough supply to meet the demand – I expect leases to go up maybe five percent next year.”

The Inland office market has a low vacancy rate because it wasn’t glutted with space during the pandemic that ended up not being leased, and that should continue to help the market grow next year, said Tom Pierik, senior vice president with Lee & Associates Riverside and an office specialist.

“I expect 2025 to be good year for landlords and a challenging year for tenants, mostly because of lease rates,” said Pierik, who said he does not expect to see any “spec” office development in the Inland region this year. “Lease rates will continue to go up, and that will be a problem for some tenants.”

The Inland office market should continue to do well in 2025, Pierik said.

“I don’t see any hot or cold markets,” Pierik said. “I expect the entire market to keep growing.”