Office market healthier than previously thought

A report says the Inland Empire has absorbed more space than Los Angeles and Orange County since the recession ended in 2010. While it’s not a full-fledged recovery, it’s at least a piece of good news.

The Inland Empire office market might be in better shape than previously reported.

No, it hasn’t had any speculative development – the sign of a genuinely healthy market – since the recession hit nearly 10 years ago.

It also had a 12 percent vacancy rate in 2016. Until that number drops a few points no developer is likely to build an office building in Riverside or San Bernardino counties without having signed at least one or two tenants in advance.

But a report published this week by CBRE Group Inc. on the U.S. office market paints an optimistic picture of office leasing in the Inland Empire. It suggests that the market has outperformed Los Angeles and Orange County since 2010, when the economy began to recover, and that trend will likely to continue for awhile.

The report called the Inland Empire office market’s recovery “slow but steady,” and noted that the region’s vacancy rate was a staggering 24 percent in 2010, meaning its vacancy rate has been cut in half during the past six years.

Neither Los Angeles, down 4.8 percent to a vacancy rate of 13.3 percent, or Orange County, down 7.2  percent to a 9.9 percent vacancy during that time, were able to to match that pace, the report stated.

That’s noteworthy because the Inland Empire office market has always played second fiddle to both of those regions, especially Los Angeles.

The report noted that the Inland Empire, while being mostly a suburban instead of a central business district market, has nevertheless attracted its share of institutional and private investors because of its “solid market fundamentals.”

Ideally, more than six years into the recovery, the Inland Empire’s office vacancy would be around eight or nine percent. Also, some speculative development would be underway, probably in downtown Riverside or near Ontario International Airport, the Inland Empire’s two major office markets.

But because the CBRE report doesn’t depict a spectacular recovery doesn’t make it a negative assessment, according to one of the people who helped put it together.

“It shows a slow and steady recovery in the Inland Empire, and that’s good news,” said Petra Durnin, director of research and analysis for CBRE. “Since the recession ended, in 2010, the Inland Empire has had positive net absorption in its office market in every single quarter. That’s a pretty impressive run.”

A similar recovery is happening nationwide. Fifty of the 58 markets tracked by CBRE reported positive net absorption in 2016, with 15 of those absorbing one million square feet or more. The report also stated that the decline of the suburban office market might have been exaggerated, that market has tightened because of higher demand and lower supply during the past six years.

The Inland Empire’s office market has improved because of several factors, including the improvement of the region’s housing industry. As the Inland Empire housing market has recovered, more businesses connected to the housing industry – construction, mortgage loan and title companies, – that need office space have moved into the area.

The Inland Empire housing market is essentially back to being what it was before the recession: the more affordable alternative to Los Angeles and Orange Counties.

“A lot of the office activity is coming from the housing market and a lot is coming from the government sector,” Durnin said. “A lot of the hiring that has happened recently has been government hiring, at all levels.”

One Inland Empire broker is skeptical of the 12 percent drop in office vacancy during the past six years.

“Yes, there’s a lot of positive absorption happening in both counties right now, but a big reason for that is there’s zero development going on,” said Rick Lazar, senior vice president with Coldwell Banker Commercial in Redlands. “Unlike Los Angeles and Orange County, the Inland Empire isn’t getting any new product.”

A lot of medical and insurance companies are moving into the Inland Empire, and schools are opening in both counties, all if which is helping to fill office space, Lazar said.

But the real issue is speculative development, meaning when someone builds an office building in the Inland Empire without a signed tenant, confident that the market is strong enough that the space will be filled quickly.

Unfortunately, Lazar doesn’t see that happening soon.

“The vacancy rate will have to be consistently below 10 percent before anyone is willing to do that,” Lazar said. “It’s impossible to say exactly how long this recovery will last, but my best guess is it will last about one more year. So I don’t think we’re going to see any “spec” during this recovery cycle.”