Speculative industrial development is resurfacing in California's Inland Empire, three years after the last shovels went into the ground. Six new projects of 600,000 to 800,000 square feet have either broken ground or will get underway in the next 60 days, said Walt Chenoweth, executive v.p. at Voit Real Estate Services. "There's very low vacancy in [industrial properties] of that size because the amount of activity in that part of the market has been white hot for nine to 12 months," he explained.
With only 7.4% vacancy, the amount of un-leased space is at its lowest level in four years and has dropped 30% from this time last year, according Voit's second quarter research. The vacancy rate is even lower in the Inland Empire's most desired area--the Western region, which has only a 6.2% vacancy rate. Additionally, the second quarter of 2011 saw 6.6 million square feet of positive net absorption double the amount from the first quarter.
With lease rates remaining flat, tenant demand for space has fuelled investor interest on the sales side of the market, which has prompted prices to spike. At the start of 2010, properties of more than 500,000 square feet were being sold in the high-$40s to low-$50s per square foot, such as KTR Capital Partners' acquisition of a Panattoni Development portfolio. "That [transaction] just opened the floodgates and anyone with money on the sidelines wanted to get back in, and the bidding wars started. Now, with the amount of investment capital trying to acquire, sales prices are skyrocketing. It's as hot as it was at the peak of the market in 2007," Chenoweth said. Now, some buildings are selling for up to $75 per foot, he added.
The competition for large core properties has driven some buyers to turn to pre-commitment deals on future speculative developments. "This just started again in the last 90 days," Chenoweth noted, adding that because the construction lending market is still constrained, having an institutional buyer lined up is the easiest way to finance development besides cash. While the real estate investments trusts aren't participating in this trend, pension and investment funds are. "It's true they have to find tenants, but they have nine months to pre-lease while building is going on, and it's a strong, space-constrained market so the risk is seen as reasonable." he added.
There is some level of concern in the Inland Empire market at this point that demand won't hold up to justify all the new space under construction, he added.