OFFICE MARKET ASSESSMENT
The Inland Empire office market registered positive absorption for the fifth straight quarter with 227k SF of direct space absorbed in Q2, its largest quarterly gain since the pandemic’s onset, bringing the trailing 12 months total up to 614K SF.
The market-wide direct vacancy rate improved by 90bps to 9.9% in Q2 and has fallen 190bps since hitting its pandemic peak early in 2021. The vacancy rate has already managed to reach its pre-pandemic level as the Inland Empire was not as severely impacted by the pandemic as other markets.
The Class B sector accounted for most of the leasing gains with 214K SF of direct space absorbed in Q2 and has led in the recovery with five straight quarters of positive absorption totaling 624K SF over the period.
The Class A sector has also shown signs of recovery with 13K SF of direct space absorbed in Q2, which was its fifth consecutive quarter of positive absorption totaling 83K SF over the period.
Leasing volume has totaled 1.2 MSF over the trailing 12-months, up 4.8% compared to prior year, but remains 27.5% below the pre-pandemic quarterly average. The majority of the leasing activity has been driven by healthcare, education, and service-related companies.
Even though leasing activity still lags its normal pre-pandemic pace, touring and leasing activity has picked up as occupiers that had postponed leasing decisions are approaching their lease expirations and are re-evaluating their future space needs.
The largest lease transactions inked in Q2 included Apostle Promise Adeyemi securing a 12k SF lease at 8678 Archibald Ave, Planned Parenthood signing an 11k sf deal at 9699 Sierra Ave, and Southwest Christian Church signing a 10k SF renewal at 28030 Del Rio Rd.
Sublease availability declined for the second consecutive quarter by 21K SF to 290K SF after hitting an all-time high in 4Q 2021. The Airport Area currently accounts for 55% of the sublease inventory across the entire market.
Construction activity remains modest with only two projects totaling 105k SF underway. Office development has primarily been limited to build-to-suit and medical office projects, which remain in high demand due to the region’s population growth.
The largest development project underway is the Canyon Springs Medical Campus in Riverside, which is a three-story property totaling 75k SF currently available for lease and scheduled to deliver by year-end.
Overall rental rates have continued to trend upwards to reach their highest level on record, up 4.3% over the past 12 months. Class A asking rents averaged $2.55 PSF per month, up 5.6% YOY, while Class B rents averaged $2.16, up 1.7% for the same period.
The office market is expected to continue to experience moderate demand and rent growth in the year ahead with limited construction and steady demand keeping vacancy rates in check.
