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‘Insatiable demand’ drives Southern California warehouse boom

“You keep expecting regulation to take a toll on business ... but when you look at the numbers and metrics, they keep going and going.”

Need space at the Inland Empire? Dream on. (Photo credit: Jim Allen/FreightWaves)

  • In 2020, warehouse transactions in the Inland Empire reached 52 million square feet, a record high.
  • E-commerce has intensified the need for distribution space around the country, as on-demand shopping shifts procurement from stores to fulfillment centers. 
  • California air quality regulators aim to hold warehouse operators responsible for environmental impacts.

The Inland Empire, a metropolitan area centered around the Southern California cities of Riverside and San Bernardino, continued a record streak of warehouse development in 2020, even as questions surface about how long the e-commerce-fueled boom will last.

Last year the Inland Empire completed 52 million square feet of transactions, the most ever recorded, according to the real estate services firm CBRE. 

Vacancy rates during the fourth quarter of 2020 fell to 1.9%, the lowest in four years. Pricing has been “off the charts,” increasing by 10% last year for quality Class A product, Kurt Strasmann, executive managing director of CBRE’s Orange County and Inland Empire Operations, told FreightWaves.

The only metric that didn’t check the record boxes was the 23 million square feet of new construction that came online in 2020.

But if that’s a bit shy of 2019 levels, it fits with overall trends, Strasmann said, explaining that over past five years in excess of 20 million square feet have been built annually in the Inland Empire. 

“It has been the most prolific market in the nation for quite some time,” he said.

The Trifecta: Ports, geography, e-commerce

It doesn’t take a rocket scientist to figure out why.

The pandemic-fueled surge in e-commerce has intensified the need for distribution space around the country, as on-demand shopping shifts procurement from stores to fulfillment centers. 

You’ve got an insatiable amount of demand,” Strasmann observed. 

Located in East Los Angeles County, the Inland Empire, population 4 million, offers easy access to the Los Angeles–Long Beach port complex, where retailers and manufacturers offload billions of dollars in products from ships to warehouses and eventually to stores and homes.

Abundant land in the former agricultural region, at least for now, rounds out the trifecta of factors driving the Inland Empire boom.

“One thing about the industrial markets is they’ve always been strong in Southern California — they’re never overbuilt,” Strasmann explained. “It’s where the available land was.”

Even during the 2009 financial crisis, vacancy rates never rose over 5%, he said. 

According to CBRE’s Q4 report for the Inland Empire, about 25.7% of projects currently under construction are pre-leased predominantly to online retailers, furniture companies and logistics users. 

Tenants paid 60 cents per square foot, up 6.7% compared to the same quarter in 2019.

Air quality regulators circle

All that construction has not come without controversy. Air quality regulators and environmental justice groups in the Inland Empire have targeted the warehouse industry for contributing to pollution and exacerbating health problems for the largely low-income and minority residents who live there.

This spring the South Coast Air Quality Management District is expected to vote on a rule that would hold warehouse operators responsible for the emissions produced by the diesel trucks that bring goods into and out of the warehouses. 

The market is unfazed.

Expressing the broader industry perspective, Strasmann said, “California is not the easiest place to do business in.”

And yet, the region’s enormous purchasing power and advantages to end customers keep developers coming back for more.

“You keep expecting regulation to take a toll on business,” Strasmann observed, “but when you look at the numbers and metrics, they keep going and going. Thus far I have not seen [regulation] affect demand.”

To put regional development in perspective, 1.8 billion square feet of product dots the Southern California landscape, from Ventura County down to San Diego. Of that, the Inland Empire alone occupies 550 million square feet.

Development pushes east

Is the boom sustainable?

“The next two years look really good,” Strasmann said. “I do not see that going away.”

But he acknowledged that even the warehouse industry’s fertile crescent may lose its ability to support ceaseless growth. “Eventually it will be built out.”

Developers are already pushing to the eastern boundaries of the Inland Empire, first to the high desert and then the low desert. 

“There’s a lot of land out there,” said Strasmann. “It’s not all zoned industrial. We’ll see how far it takes us.”

National trends

The Inland Empire may lead the country but the blazing hot market is reflective of national trends. 

In 2020 demand for industrial buildings of all sizes surpassed 2019 totals but were strongest in mega facilities of 1 million square feet or more, according to CBRE.

The top 100 transactions last year totaled 103.8 million square feet, 17% above 2019’s total.

Related stories:

California’s road to reducing truck emissions runs through warehouses

Warehouse automation: What’s in store for 2021

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Linda Baker, Senior Environment and Technology Reporter

Linda Baker is a FreightWaves senior reporter based in Portland, Oregon. Her beat includes autonomous vehicles, the startup scene, clean trucking, and emissions regulations. Please send tips and story ideas to [email protected]