IE Business Daily Business news for the Inland Empire.
With 2023 on the horizon, the Inland office market is showing signs of life, including vacancy below 10 percent and the possibility of more construction. Much depends on whether a recession hits this year, and if so, how severe it may be.
Is the Inland Empire office market starting to perk up?
It is according to the UC Riverside School of Business Center for Economic Forecasting and Development, which last week published its report on business activity in the region during the third quarter.
The report, which looks at all sectors of the Inland economy, contained the following eye-popping statistic regarding office construction in Riverside and San Bernardino counties: during the first nine months of 2022, requests for office construction permits were up 380 percent compared with the first nine months of 2021.
It would be easy, and accurate, to dismiss that number as inflated because of the pandemic, which eliminated virtually all office construction in the Inland region during the last two years, said Taner Osman, research manager at the forecast center and a co-author of the business activity index.
But it’s also true that those permits were pulled when a lot people were still working from home rather than returning to the office, something that should depress, not increase, the demand for new office space.
The index also notes that office vacancy fell only two percent during the first nine months of this year, a sign that the Inland office market is at least holdings its own as it prepares to enter 2023.
“I think this shows how resilient the Inland Empire economy is, and that the office market is a lot stronger than most people thought it was,” Osman said. “They’ve both held up pretty well over the last 18 months, and I think there’s reason for optimism heading into 2023.
As 2022 draws to a close, the Inland Empire office market does appear to be in good shape, and maybe even a little better than that.
At the end of the third quarter, the vacancy rate in Class A office structures in Riverside and San Bernardino counties was 8.6 percent, less than a one percent year-over-year increase, according to Cushman & Wakefield.
During the first nine months of this year, average lease rates for Class A office space were $2.58 a square foot. Leasing – not counting renewals – was up 19 percent compared with the first nine months of 2021, a rate Cushman’s third-quarter report called “healthy.”
On the negative side, absorption was minus 112,191 square feet, despite nearly 30,000 square feet of net gains in southwest Riverside County.
Also during the first three quarters of this year, 420 office transactions were completed in the Inland Empire, deals that covered an estimated one million square feet. During the first nine months of 2021, with COVID-19 still causing major problems, those numbers were 430 transactions and 863,715 square feet.
More people continued to work out of the house this year, or worked “hybrid” schedules – some days at home, some days in the office – which caused some office space to go vacant.
Occupancy fell by 93,188 square feet in the third quarter. For the first nine months of the year, that number was 112,191 square feet, Cushman & Wakefield reported.
Inland Empire east – Riverside, San Bernardino, Redlands – accounted for the largest occupancy losses in the first three quarters of 2022, at 133,748 square feet, while the west end – Ontario, Rancho Cucamonga, Fontana – lost 8,335 square feet of office occupancy during that time.
The south end – Corona, Temecula, Murrieta – added nearly 30,000 square feet of office space during the first three quarters of this year but still had a 7.1 percent vacancy rate when the third quarter ended.
Since the Great Recession, little if any office space has been developed in the Inland region. But there was surplus space from previous development that has filled in little by little, and that process is accelerating, said Rick Lazar, senior vice president with Lee & Associates Riverside.
“We’re starting to see some office development, and when office space comes online it’s absorbed pretty quickly, especially on the east side,” Lazar said. “If the price is right, people want a piece of it. That should continue, unless we hit a recession.”
As for 2023, Lazar expects east-end vacancy to “hover” around 10 percent, absorption to improve and average lease rates be around $1.85 a square foot.
Some construction will happen, but none of it is speculative, Lazar predicted.
“But that’s a major improvement because for the last 15 years we basically haven’t had any office development,” Lazar said.
Overall, the Inland office market is performing better now than it has in years, and it will probably continue to do well in 2023 despite the possibility of a recession, said Jerry Holdner, head of Avison Young’s Southern California innovation and insight team.
“I do expect a recession next year, but a mild one,” Holdner said. “Nothing that will hurt the market very much, but more people will go back to the office, and we will see some development, but probably not any spec.”
Nine office properties that will cover a combined 175,000 square feet are currently under construction in the Inland Empire, and 75 percent of that is pre-leased.
That’s a good way to head into the new year, according to Holdner.
“The Inland office market should perform well in 2023,” Holdner said. “Not gangbusters, but it won’t be a soft market, either. I think it will ride this one out.”
