Latest / Industrial Advisors / Inland Empire Industrial Market: Falling Rents, 3PL Demand & 2027 Outlook

Transcript

Inland Empire Industrial Market: Falling Rents, 3PL Demand & 2027 Outlook · Industrial Advisors

• 0:00
  For every one building that leases in the Inland Empire, there's another
• 0:03
  building that comes back on the market.
• 0:05
  And we're, we're having this all happen in a market where there's no new construction
• 0:09
  or very limited new construction.
• 0:11
  So
• 0:25
  Welcome to our Industrial Advisors podcast.
• 0:28
  We're live in, uh, Columbus at the IAMC conference.
• 0:31
  We're kicking it off with the legend Steve Baleti to talk about the,
• 0:34
  uh, inland empire, and the market, and everything that's going on in
• 0:37
  the IE. Well, thanks for having me.
• 0:39
  Glad to be here in Columbus.
• 0:41
  First day of the, uh, IAMC conference.
• 0:43
  And so, uh, I think we're gonna have a good time here.
• 0:45
  And, uh, I'm just glad to be on this podcast, so-
• 0:48
  Yeah … thanks for having me.
• 0:49
  Well, let's jump in.
• 0:50
  Um, Kyle, why don't you kick us off?
• 0:51
  Yeah, and this is part of the series we're rolling out where we highlight
• 0:53
  a West Coast market, so obviously had to bring in Steve for the IE.
• 0:57
  But Steve, obviously during COVID, the IE went gangbusters, was one
• 1:01
  of the best markets in the country.
• 1:02
  It then saw a really sharp correction in 2022, 2023.
• 1:05
  Probably 2023 was when that started.
• 1:07
  Where are we now?
• 1:09
  I think there's been some improvement in that market, and where is
• 1:11
  that improvement coming from?
• 1:12
  Well, I don't know if it's improvement, good, bad.
• 1:15
  It just depends on what lens you're looking at.
• 1:17
  Obviously, if you're a tenant going through what they did, had to go through
• 1:20
  during COVID, where we kind of had a normalized market in the Inland Empire,
• 1:24
  everything was kind of predictable.
• 1:26
  People were drawn to there because of the, the main fundamentals with the 25
• 1:30
  million people, the two greatest ports in the US, and then it become unpredictable.
• 1:34
  Obviously, rents be- due to the craziness of COVID and the, uh, the unnatural demand
• 1:39
  drivers, rents went up 100% in two years.
• 1:42
  Yeah.
• 1:42
  So unpredictable.
• 1:43
  So obviously that was a good short period of time for the landlords, but
• 1:48
  obviously, uh, many of our tenant, uh, clients really suffered during that time,
• 1:52
  both, both financially having to pay these crazy high rents, and then also
• 1:56
  just the difficulties associated with the supply chains that went on during COVID.
• 2:01
  Well, the Inland Empire is really the poster child for
• 2:04
  what the excesses of COVID.
• 2:06
  So we had that increase of 100%.
• 2:08
  We've now had four straight years of declining rents in the Inland Empire.
• 2:12
  So our market fundamentals have changed dramatically.
• 2:15
  Rents probably from peak levels have gone down about 45 to 50%.
• 2:20
  You've seen vacancy rates spike up, and now there's a situation where
• 2:24
  it's, you know, the exact opposite where it's now a tenant's market.
• 2:28
  And so because of the where rents have gone and how people kind of
• 2:33
  changed their mindset about the Inland Empire during COVID, you know, we've
• 2:37
  had this crazy adjustment period, and we're still going through it.
• 2:40
  It's one of those things where everybody asks me to, to predict the bottom, and
• 2:43
  I'm not the guy who's gonna do that today.
• 2:45
  Yeah.
• 2:45
  I still think we have a ways to go, and again, it's the hangover
• 2:48
  that we've been dealing with, with from COVID, and, uh, it's just the
• 2:51
  reality of the situation today.
• 2:52
  Yeah.
• 2:52
  So you think there's a lot of months, potentially years to go?
• 2:55
  I know you guys built like crazy during that COVID boom, right?
• 2:57
  Yeah.
• 2:57
  So you're working through that pipeline still, I'm sure.
• 2:59
  Yeah, I think we're working through it.
• 3:01
  There are some certain demand drivers that are unique to the Inland
• 3:03
  Empire today, such as the Asian 3PLs, which we hadn't seen before.
• 3:07
  But corporate America and all the major and, and, um, regional 3PLs
• 3:13
  all took too much space during COVID.
• 3:15
  They all were kind of forced to go, "Oh my God, we need space," whether it was
• 3:19
  the major retailers or the 3PLs or the clients that were driving behind there.
• 3:23
  They all took too much space, and we're still working through that.
• 3:26
  Now, one thing that people are saying is that we're now kinda going through it.
• 3:30
  We've been through four years of it.
• 3:31
  Now, the vintage of the leases are now gonna be 2022 next
• 3:35
  year, so we're gonna kinda work through those last COVID leases.
• 3:38
  Yep.
• 3:39
  And then hopefully as we go through that, you know, we'll get back into a situation
• 3:42
  where we get to a more balanced market.
• 3:44
  But it's still very perplexing to me to see the amount of give backs that
• 3:48
  people are giving back to the market.
• 3:49
  You know, for every one building that leases in the Inland
• 3:52
  Empire, there's another building that comes back on the market.
• 3:55
  And we're, we're having this all happen in a market where there's no new construction
• 3:59
  or very limited new construction.
• 4:01
  So it's not the new construction like some of the markets like Dallas or Phoenix
• 4:05
  where you have new construction that impacts the supply and demand dynamic.
• 4:08
  It's quite frankly, it's the give backs.
• 4:10
  It's, it's everybody waking up saying, "I have too much space, so instead of moving
• 4:14
  out of this other building over here, I just wait till the lease expires, then
• 4:17
  I'll move out of that building." Right.
• 4:18
  And so again, we'll see how it plays out in 2027.
• 4:21
  I think everybody's a lot more optimistic about '27, in that
• 4:24
  the worst is probably behind us.
• 4:26
  But I think there's certainly certain size ranges, certain areas that
• 4:29
  we still have, uh, a ways to go.
• 4:31
  How's the… I mean, you have some big sub-markets within, within the
• 4:35
  IE. How's the west and the east comparing to each other right now?
• 4:39
  And is there more activity in one or the other?
• 4:41
  Yeah, I mean, I, I characterize it as two things.
• 4:43
  Bigger is better, so especially if you're dealing with 36-foot clear buildings,
• 4:48
  cross docks- Whether it's the west or the east, those are all doing just fine.
• 4:52
  Or you're seeing a general balance between the, uh, the supply and demand.
• 4:56
  As we look at the market today, you'll get the, the west.
• 4:59
  The west is doing much better than the east, mainly due to the fact
• 5:02
  that the biggest demand driver in our market today is the Chinese 3PLs.
• 5:06
  Mm-hmm.
• 5:07
  You know, I know they've influenced other markets across the country.
• 5:09
  They've influenced other markets across the West Coast.
• 5:11
  They're not a small influence in the Inland Empire.
• 5:13
  They are a demand driver.
• 5:15
  I remember you telling me at one point they were, like, 75% of the… This might
• 5:20
  have been a year or two ago, but they were 75% of the tenant activity at one point.
• 5:24
  So as you know, we, we focus on the bigger deals in the Inland Empire.
• 5:27
  Yeah.
• 5:28
  And so if you just look at the- You're, you're a big deal guy.
• 5:29
  I know.
• 5:29
  I mean, we all know that.
• 5:30
  You don't need to tell us.
• 5:31
  Yeah, yeah.
• 5:32
  So we focus on the bigger deals in the Inland Empire.
• 5:34
  And if you look at the overall market in the Inland Empire of, of the world
• 5:37
  of 200,000 square feet and greater, which is really the big box world in
• 5:41
  our market, since January 2024 to today, the Asian 3PLs, which historically
• 5:46
  have made up 5%, 8%, maybe as, uh, much as 10% of the overall demand,
• 5:52
  have made up 55% of all the deals.
• 5:54
  Not just the small deals- Yeah … but the larger deals.
• 5:57
  Wow.
• 5:57
  And so if you look back, so they made up 55.
• 6:00
  So and since then, we've probably done, done 177 deals over 200,000 square feet.
• 6:05
  They made up 55% of it.
• 6:06
  They have now leased, just since the beginning of '24, they have now leased
• 6:10
  38.1- Million square feet in our market.
• 6:14
  Oh, wow.
• 6:14
  Not renewals, not a… vacant buildings that they go into,
• 6:18
  38.1 million square feet.
• 6:20
  Wow.
• 6:20
  So they are not a little part of our market today.
• 6:23
  They are a significant market, significant part of our market.
• 6:27
  And as much as people wanna say this is a negative for the Inland Empire, without
• 6:31
  the Chinese 3PLs, I think our market would be far worse off than it is today.
• 6:35
  Yeah, it's interesting, 'cause I wanted to ask about the port, and I know you
• 6:38
  mentioned there's a lot of particularly 3PLs giving back space right now,
• 6:41
  and I was going to ask if, if that's because port volumes in LA and Long
• 6:45
  Beach are down 'cause of tariff policy.
• 6:47
  But it's an interesting dynamic to think about Chinese 3PLs taking up
• 6:50
  a lot of the space, 'cause obviously they're a big port user as well.
• 6:53
  Yeah.
• 6:53
  So yeah, can you touch on that kind of dynamic?
• 6:55
  So the, the port volumes aren't the issue.
• 6:57
  I mean, obviously we had some pretty significant disruptions when, um,
• 7:02
  all the saber-rattling with the tariffs and all the unknowns and
• 7:05
  people not knowing what to do.
• 7:06
  Over the last 12 months or so, or even the last 18 months, we've seen
• 7:09
  port volumes quite frankly stabilize, and actually are on the upswing.
• 7:13
  I think September was a really crazy, amazing month, and I think port volumes
• 7:18
  are generally, you know, 4 to 6%.
• 7:20
  Forecast to be 4 to 6% higher than last year.
• 7:22
  I think we'll see continued stability on the port volumes because of the, the
• 7:26
  stability of the tariffs, but even more so as there's been more uncertainty
• 7:31
  with some of these other transportation models where you're going through the
• 7:34
  Suez Canal, obviously big problem.
• 7:37
  Panama Canal, obviously big problem.
• 7:40
  You know, this whole direct ship to LA and Long Beach, it's very predictable,
• 7:43
  and although there's some… there- for a long reason, people wanted to diversify
• 7:47
  out of those port markets, o- out of the LA ports, uh, I think today they're
• 7:51
  the most, they're the most reliable of all the ports, entries into the U…
• 7:54
  into the US.
• 7:55
  Let's talk a little bit more about the big box market.
• 7:57
  You touched on it.
• 7:58
  Um, you, you obviously play in, in that world.
• 8:00
  Is it still 500,000 square feet and above if you're representing a tenant?
• 8:04
  Is it still a tenant favorable market to go out from a concession standpoint?
• 8:08
  You have plenty of options, vacancy stand…
• 8:11
  from a vacancy standpoint.
• 8:12
  Is it still a, a tenant's market in that world?
• 8:14
  Yeah, no, it's, it's a tenant market.
• 8:15
  It's gonna be a tenant market for a while.
• 8:17
  You know, we have a situ- until corporate America comes back, until corporate
• 8:21
  America figures out that the Inland Empire's on sale, that's one of the things
• 8:25
  I think that probably will be a good theme through 2027, is as these COVID vintage
• 8:30
  leases roll, and then the word gets out to corporate America that on a relative
• 8:35
  basis, the Inland Empire is on sale, especially if you start looking at some of
• 8:39
  these lease rates that you're getting in Phoenix, where you're seeing lease rates
• 8:43
  upwards of 75 cents triple net in Phoenix.
• 8:45
  Yeah.
• 8:46
  And then you can get that same building in Moreno Valley for probably almost
• 8:50
  the same price, maybe, uh, a 10% higher.
• 8:53
  I feel like corporate America's analytics will figure out that,
• 8:56
  like- Why bring it all the way to Phoenix- Right … to bring it all
• 8:59
  the way back to the 25 million people?
• 9:01
  Right.
• 9:01
  Yeah.
• 9:01
  That was a great diversification play when things weren't so predictable.
• 9:05
  But now that things are so predictable, I think that's the one thing that
• 9:08
  we'll find ha- going forward.
• 9:09
  Interesting.
• 9:10
  Well, Steve, to close it out, we kind of want your crystal ball.
• 9:12
  Is there a trend in the IE that you think the broader community
• 9:15
  hasn't caught onto yet, or, uh, you know, a, maybe a wave that's coming
• 9:19
  that people haven't forecasted?
• 9:20
  You know, I think the Inland Empire is a market that even w- as bad as our
• 9:24
  market is today, we still are doing, like, I think this year we've done
• 9:28
  48 deals over 200,000 square feet.
• 9:31
  We'll probably do pretty close to a record leasing year in the Inland Empire.
• 9:35
  The one thing I think that is gonna happen next year is I think people are going
• 9:38
  to figure out that, again, the Inland Empire's on sale, that the opportunity
• 9:44
  for tenants to take advantage of a market today in where they, you know, and many
• 9:49
  times for the last four or five years have been, you know, probably poorly treated
• 9:53
  by the landlords, poorly treated by, you know, in trying to get new opportunities.
• 9:58
  I think they're gonna figure out that t- the, the Inland Empire is back.
• 10:00
  The things that made the Inland Empire great are gonna come back
• 10:04
  and it, it'll start with pricing.
• 10:06
  Yep.
• 10:07
  Lot of positive, you know, feedback and forecast coming out of that market.
• 10:10
  Yeah.
• 10:11
  Well, appreciate you joining us.
• 10:13
  There's nobody that knows the market better than you, so
• 10:15
  thank you for your insights.
• 10:16
  And, um, Steve, as we all know, is as good as it gets in the industry.
• 10:20
  So always appreciate you joining us.
• 10:22
  Glad to be here, and, uh, let's have some fun in Columbus.
• 10:24
  All right.
• 10:24
  Let's do it.
• 10:25
  Thank you.
• 10:25
  Yeah.
• 10:25
  Thank you.