The demand for retail space in SoCal’s Inland Empire continued to grow in 2016 and the outlook for 2017 is positive as well. Our team at Progressive Real Estate Partners reports a high level of interest and activity in both retail leasing and investment sales and the region continues to post strong economic results which bodes well for the overall market.
Some highlights of 2016:
- Improving Vacancy Rates – The retail vacancy rate declined from 8.3% at the beginning of 2016 and closed the year at 7.5%. Unlike the past few years when the Inland Empire “West” vacancy rate was much lower than the Inland Empire “East” vacancy rate, currently the West is at 7.3% and the East is at 7.5%.
- The Coachella Valley and High Desert markets are still the most challenged with vacancy rates at 9.7% each. The greater Corona area stands out as the best market with a vacancy of only 4.8.
- Strong Net Absorption – The year ended with net absorption of approximately 2.2M square-feet which is by far the highest number we have had in years. By comparison, 2015 was under 1M.
- Out of the 2.2M square-feet, about 800K was constructed in 2016 and, since most of this new square footage was pre-leased or leased shortly after construction was completed, it means about 1.4M square-feet of 2nd generation space was absorbed in 2016. This is the best absorption in many years, but there is still 13.3M square feet of vacant space.
- Of the 13.3M square feet, approximately 50% has been available for more than 2 ½ years with at least a few million square feet on the market for more than 5 years.
- Declining Cap Rates – The cap rates continued their modest decline to an average of 6.1%. This is across all product types including single tenant which has generally been trading below the average with multi-tenant generally trading above the average.
- Investment Sales Volume – Volume was off 38% in 2016 compared to 2015 to a total of $1.15B. This is a reflection of various factors including the uncertainty of the presidential election but I believe it’s primarily due to a disconnect between buyers and sellers. Buyers seem more concerned about economic risk and rising interest rates while sellers are seeing their properties performing well and believe that tomorrow could be better than today.
What I Like Heading into 2017:
- Job Growth Continues to Be Strong – The Inland Empire gained 41,200 jobs in 2016 representing a 3% annual growth compared to California’s 2%. The only region in California to surpass the 41,200 figure was Los Angeles County.
- New Home Construction Poised to Rebound – New home construction has continued to be relatively flat, but it looks like 2017 will be the year when homebuilding rebounds which will likely create a positive ripple effect across the retail market. People who buy and build new homes spend money in the retail sector.
- Home Prices Increasing – Existing home prices are continuing to increase at a pace of 7.2% and 6.8% in San Bernardino & Riverside Counties respectively. These increases will help to further launch the new home market which has been below historical averages for years. Furthermore, when people know their house is going up in value, they are more inclined to spend.
- New Retail Construction – Plans for new retail construction in 2017 are modest and mostly pre-leased and should be easily absorbed, especially in centers that are well-located and well-anchored.
- Retail Expansion – The retail, restaurant and service sectors are all experiencing modest expansion and the Inland Empire continues to be high on the list for expanding retailers.
My Concerns Looking Ahead to 2017
- Election Uncertainty – President Trump makes me uncomfortable. It’s hard to know what to believe which means that until we see his actual actions and results there are many unknowns. There are so many issues up in the air right now — tax policy, healthcare, tariffs, business regulations, immigration policy and more. If the cards come up a certain way, this could be a boon for the SoCal economy. If they come up a different way, we could have some challenges.
- Online Retailing – Amazon and other online e-commerce players keep pecking away at brick and mortar retailers. I am a modest Amazon shopper and not much of an online shopper, but when I find myself starting to shop online because the stores don’t have what I want or because the customer service in certain stores is poor, it is a concern. It will be important for brick and mortar retailers to continue to innovate and fine-tune their concepts to appeal to shoppers. On the positive side, Amazon has leased 6M square feet of industrial space in the Inland Empire over the past 5 years. This is more than all the new retail construction in the I.E. during that same time frame. So at least our region is benefitting from the Amazon jobs, but it can’t be helping our retailers.
- The Maturing Economic Cycle – It’s hard to predict when the next recession will be, but I know there will be one. From 1997 until 2007, a lot of people kept telling me the end of the cycle was about to happen. If I had believed them, I would not have prospered throughout the early 2000’s. So as we delve further into this cycle, I believe the economic expansion will continue, BUT I will also make sure I am prepared if it does not so that I can make sure that I am here to play throughout all the cycles.
All and all the outlook for SoCal’s Inland Empire is positive for 2017 and, while there are some unknowns, I’m looking forward to another prosperous year. I hope to see many of you at the ICSC SoCal Idea Exchange in Los Angeles next week.