Q1 2025 Outlook: Market Headwinds, Tariff Impacts & Strategic Moves in the Inland Empire

Real Estate Market Overview

Entering the first quarter of 2025, the real estate market has largely remained challenging. While some disruption was expected with the new administration, tariffs have added significant uncertainty. These tariffs impact commercial real estate by driving up costs, which are passed on to consumers. Combined with rising inflation, this has caused consumers to pull back on spending, hurting business revenue. As a result, many companies are delaying expansions or relocations until market conditions stabilize.

Interest rates have remained somewhat steady this first quarter, following a cut in December 2024. However, inflation continues to rise, with tariffs potentially worsening the situation. The Federal Reserve has indicated it may reduce rates in 2025, but the timing will depend on multiple factors. If inflation persists, it may be hard to justify cuts, but if the economy slows, rate cuts may become necessary.

In the long term, tariffs could prompt US companies to increase domestic investment, possibly boosting job growth and local manufacturing. However, the potential impermanence of tariffs makes this outcome uncertain.

Inland Empire Industrial Market

For the Inland Empire industrial market, signals are mixed. While some areas show promise, others face challenges. The gap between the Inland Empire West and the East is widening, with demand concentrated in core areas like Chino, Ontario, and Rancho Cucamonga. Lease rates are declining, but the pace of decline is slower than last year. Vacancies, sometimes lasting months or years, remain common. Sale values are declining, but at a slower pace than lease rates, as supply constraints have kept major reductions at bay.

For investors, cap rates have remained stable, reflecting the interest rate environment. However, underwriting has become challenging due to market uncertainty. Unless we target a pure basis play, purchasing vacant or short-term leased assets can be risky. Accurately predicting downtime, concessions, and lease rates requires expertise and reasonable caution.

For owner-users, it may be a good time to revisit long-term strategies. While leasing remains attractive with TI packages and free rent, the experience of the last market cycle suggests that owning property, especially in the Inland Empire, could be a wise strategy for controlling long-term business stability and costs.

For tenants, now is a favorable time to seize the moment, particularly for stable businesses. This is an ideal time to work with a local broker to negotiate lease expansions or renewals, consider blending and extending leases to match market rates, or request favorable TI packages.

For landlords, cooperation and local intel is key. Understanding market dynamics and competition is critical. Private landlords have a unique advantage over institutional competitors and should use this flexibility to stay ahead.

Real Talk with Real Experts: Inland Empire Industrial Owner User Edition

Real Talk with Real Experts: Inland Empire Industrial Owner User Edition
Featuring: Sean Sullivan, Vice President

Sean is a specialist in owner user requirements who recently brought to market a 12,450 SF freestanding industrial building on Balboa Avenue, south of the Ontario Airport.

What is the current state of the market?

Activity is strong, all things considered. However, buyers are less confident because of uncertain lending. Some institutional banks have paused indefinitely to assist with government assistance programs. Capital is still available for those willing to work with other groups. Those searching pre-COVID are still in the market, especially for challenging requirements.

Can you explain the array of pricing?

New product continues to reach record figures. Consumers demand functional buildings and are willing to pay up. One issue is the increasing gap between class A and class B product. It’s common for class A product to drag other classes upwards, but the gap is widening. A 20-year-old or older building will not sell for new product pricing. Better clear height, loading and general efficiency play a vital role in value. Buyers understand this but many sellers do not. Additionally, higher clear height can reduce the footprint and overall cost of the acquisition. This provides justification for record high offers.

Will small buildings be built again?

Developers prefer larger sites because they can build larger buildings. Only a handful of specialized developers are interested in sites less than 7 acres. However, prices for small buildings are increasing rapidly, and we predict more small development is on the horizon. As the IE west becomes an infill market, developers will be forced to look at small building projects.

Is a market downturn inevitable?

Pricing has not taken a hit in the IE, but if the virus gets worse, things may change. Variables to be mindful of include a second wave or a political change. Government assistance programs will inevitably halt, and a picture of the actual damage will be clearer. For now, low vacancy and solid demand will keep the market moving.

Is this a risky environment to purchase a building?

For the right fit, it’s always a good time to buy. Buyers who plan to own and operate for the long run should have faith in macro market fundamentals. For example, clients who considered purchasing 5 years ago are kicking themselves today. We recommend buyers stay patient and thorough but unafraid of seizing the right opportunity. The market is competitive and those who hesitate often find themselves on the sidelines.

By: John Viscounty & Sean Sullivan

jviscounty@voitco.com
ssullivan@voitco.com

The Value of Brokers in the Digital Age

With so many free resources available, small- to mid-sized real estate consumers may question the utility of a broker. Some may consider working directly with the listing broker. Although a case can be made to work directly, most real estate occupiers misunderstand the value of representation. Here are the key reasons a broker can help, even in the digital age.

Tenant & Buyer Representation

Listing brokers typically have strong relationships with their owners. A good listing broker can work a project for decades and will have a personal relationship with the client. In addition, the listing broker has a fiduciary responsibility to the landlord. A tenant or buyer broker will work to get their client the best deal possible and make sure they understand every element of the transaction. This creates clear representation for each side of the transaction and eliminates any bias.

Worthwhile Landlord Representation

Landlords can view paying commission fees as a way to lower risk. When a broker is hired, landlords increase their chance of securing a higher quality tenant. Most brokers can run credit checks, talk to previous landlords, tour facilities, analyze tenant financials and interview executives from the prospective tenant. They know real players versus “window shoppers.” 

Knowledge Versus Information

There’s no question consumers have access to information. With several outlets providing information on listings and comps, the information gap is narrowing. However, market knowledge and experience are the ingredients that cannot be found on these websites. Will the landlord give a TI allowance? Will they negotiate? Do they occupy a neighboring building? What kind of credit do they require? Rather than inquiring on several properties, a knowledgeable broker will point consumers towards feasible opportunities.

Objective Advice

“I have a broker but send me what you have.” Although brokers may appreciate the gesture, an issue is created. Instead of one broker presenting the market objectively, five are now blasting a consumer with every opportunity on the market. Each building is better than the last and a better deal can be made. Will this strategy land the client the best deal? It is better to have one broker who can objectively show you a full and detailed picture of the market.

Exceptions

Off market deals are a rare and highly sought-after commodity. If a listing broker brings a client a direct deal, an exception to the norm could be recommended to allow for the broker to represent both sides. Assuming an existing relationship, consumers should be able to trust the broker is a market expert who will honor their fiduciary duty in the dual representation.

A trustworthy broker will make the process easier, timely and more advantageous. They know what it takes to get a deal done. A broker will save consumers time and money, help avoid immediate and future pitfalls, and become a long-term consultant. Local brokers know their competitors, contractors, vendors, governmental entities and landlords. Brokers want future repeat clients and their reputation are at stake, so expect top service.

by John Viscounty
ASSOCIATE, INLAND EMPIRE
909.545.8002  .  JVISCOUNTY@VOITCO.COM  .  LIC. #02028915