OFFICE MARKET ASSESSMENT
The Inland Empire office market posted positive absorption for the fourth straight quarter with 175k SF of direct space absorbed in Q1, its largest quarterly gain since the pandemic’s onset, bringing the trailing 12 months total up to 455K SF.
The market-wide direct vacancy rate improved by 60 bps to 11.0% in Q1 and has improved 130 bps since hitting its peak early in 2021. The vacancy rate has managed to fall below its 5-year historical average of 11.4% and only remains 90 bps above its pre-pandemic level as the Inland Empire was not as severely impacted by the pandemic as other markets.
The Class A sector has also shown signs of a recovery with 14k SF of direct space absorbed in Q1, the fourth consecutive quarter of positive absorption totaling 45k SF over the 12-month period. The Class B sector accounted for 161k SF of direct space absorbed in Q1 and has led in the recovery with four consecutive quarters of positive absorption totaling 410k SF over the period.
The largest occupancy gains in Q1 involved San Bernardino County Fire District’s 71k SF lease commencing at 1111 E Mill St and City of Hope Corona moving into 32k SF at the recently delivered Corona Regional Medical Campus at 320 W 6th St.
Leasing volume has totaled 1.2 MSF over the trailing 12-months, up 10.1% compared to prior year, but remains 26.9% below the pre-pandemic quarterly average from 2017-19. Healthcare, education, engineering, and legal services tenants have contributed to the rise in leasing activity over the past year.
Office development has primarily been limited to build-to-suit and medical office projects, which remain in high demand due to robust population growth. Two projects totaling 53k SF delivered in Q1. The only significant project underway is the Canyon Springs Medical Campus in Riverside, which is a 75k SF three-story property currently available for lease and scheduled to deliver by year-end.
Sublease availability declined by 29k SF in Q1 to 310k SF after hitting an all-time high during the prior quarter. The Airport Area submarket currently accounts for 53% of the sublease inventory across the entire market.
Even though leasing activity still lags its baseline pre-pandemic pace, touring and leasing activity have picked up in recent quarters as users that had postponed leasing decisions are approaching their lease expirations and are re-evaluating their future space needs.
Overall rental rates have continued to trend upwards to reach their highest level on record, up 4.5% over the past 12 months. Class A asking rents averaged $2.57 PSF per month, up 6.2% YOY, while Class B rents averaged $2.14, up 2.0% for the same period.
While the recovery efforts show a promising outlook for the local economy, the office market is poised to make a healthy rebound in the year ahead with limited construction and growing demand pushing vacancy rates toward pre-pandemic levels.