The Inland Empire industrial market continued full speed ahead this quarter. Lease and sale figures increased dramatically across the board as the dust from the pandemic’s uncertainty settled. Inventory stretched to record lows, while buyers and tenants struggled to fulfill requirements, leaving leverage in landlord’s hands. Developers charged full speed providing new supply, but demand outpaced all efforts.
The market surpassed expectations and rationale for most. We credit the run to several factors:
Competition: Competition turbo-charged the market. Buyers and tenants alike lost on deals and were conditioned to act aggressively. Inflated pricing fears were erased by the 12-year appreciation streak. Tenants and buyers attempted to lock in rates before it became even worse. Buyers in escrow on quality assets could expect their building to be worth more by the time the deal closed. This had many buyers, especially investors hungry for more.
Development Allure: As developers gobbled industrial land, an interesting predicament surfaced. Those advertising their space for sale or for lease with a price when construction began may have left money on the table. Rather than locking themselves in, developers and landlords recently waited until they were closer to completing construction or having a vacant space, before advertising a formal price. Tenants and buyers aggressively offered on development opportunities, but often heard crickets from the other side. As buildings were listed at $TBD, rates secretly marched forward.
Cost of Capital: The cost of capital remained low allowing owner users and investors justification for paying top dollar. As the fed contemplated raising interest rates, the threat incentivized buyers to lock in low rates while they still could. One caveat to this theory was investor financing. Banks commonly advertised low rates for owner users, but standards for investors appeared more stringent. This may be contributed to owner users having more skin in the game, from a lender’s perspective. An investor only has the property to lose if they default, while an owner user has their entire business on the line, which may have provided lenders reassurance. Investors may have discovered lower LTV offerings than expected.
Port Congestion: As many beachgoers witnessed, port congestion only worsened. Per the Marine Exchange of Southern California, the number of ships waiting outside of Los Angeles and Long Beach ports reached 73 as of Sunday, September 19th, 2021. From labor shortages to an increased demand on consumer goods, the port struggled to facilitate efficiently since the inception of the pandemic. This congestion only added to the desperation for warehouse space in the Inland Empire. Businesses elected to increase inventory in order to avoid delays from deliveries, which further increased demand for space.