Office and industrial vacancy rates continue to rise on weakened economy

My newest article from The SB Sun:

It is widely acknowledged that things grew too fast out here in the Inland Empire (houses, debt and commercial development), and we are now beginning to realize the seriousness of an inevitable contraction period. The U.S. economy shrank in the third quarter of this year at an annual rate of 0.3 percent, the sharpest decline since 2001.

The office and industrial real estate markets are responding to these conditions as vacancy rates continue to rise, asking rents begin to fall, and landlords worry about empty buildings and tenant bankruptcies.

For the Inland Empire office market, new developments over the past year have totaled 1.99 million square feet, increasing the amount of office space by 9.7 percent. Most of this new space has been delivered to the market vacant, causing the direct vacancy rate to increase from 11.9 percent last year to 17 percent this year.

Despite these large changes in the vacancy rate, asking rates have been slow to respond, dropping only five cents over the previous year to end at $1.95 per square foot per month.
While these rates are the lowest in the five-county Los Angeles Basin, further declines will be necessary due to the sheer volume of vacant space.

Deteriorating market conditions leading to softening rents and increased vacancies throughout Southern California have eroded the competitive aspects of the Inland Empire office market. As a result, things are unlikely to rebound until office markets in Los Angeles and Orange County return to normal. Local demand is not sufficient to deal with existing vacant space.

"The industrial market in the Inland Empire is also showing signs of weakness due to oversupply issues and fundamental changes in the global supply chain" says Tom Taylor, senior vice president of Colliers International. "The Inland Empire is the premier gathering point for foreign goods entering the country from Asia. Declining imports, rising fuel costs, declining consumption and poor economic conditions means that profit margins are down, and everyone has to work harder and cut costs just to stay in the same place. "

Vacancy rates in the east Inland Empire now stand at 19.9 percent, up considerably from 12.3 percent a year ago due to construction completions. For the west Inland Empire, the vacancy rate is also rising, now at 7.6 percent up from 2.5 percent a year ago. This is due to firms shrinking their operations or going out of business as the economy contracts.
Things are already bad for the Inland Empire.

According to the Wall Street Journal, the region had the nation's highest unemployment rate of 9.2 percent in August. The second-highest rate was metropolitan Detroit at 8.8 percent. We are in the transition period after the housing peak, where uncertainty is the greatest, and the largest changes are still yet to come.

Thomas Galvin is a research associate at Colliers International commercial brokerage firm in Ontario who uses econometrics to study Inland Empire real-estate trends and produce theory models.