Thinking Outside The Big Box

January 6, 2020

By: Lindsay Mingee, Suburban Office Specialist;

Lee & Associates Commercial Real Estate Services – Inland Empire

Though the Inland Empire commercial real estate market has become practically synonymous with three words: “Industrial Big Box”, the region actually boasts 76.7 million square feet of suburban office space which has experienced consistent, stable growth in occupancy, rent rates, and property values over the past 12 years.

Even the global pandemic which dealt an annihilating blow to neighboring Los Angeles, seemed to roll over the Inland Empire’s suburban office market leaving only mild flesh wounds.  In Summer of 2020, The Mudge Team at Lee & Associates – Riverside published a report on why the Inland Empire Office Market was well-positioned to bounce-back from COVID-era destruction. At the time, the report held tight to an optimism that all would be well moving in to 2021. However, despite the ongoing challenges of the pandemic, the Teams’ projection of the perpetual strength of the Inland Empire’s three key market drivers remains unchanged:

Rates and pricing for Inland Empire commercial office property will continue to offer value-add economics for national and regional investors and office occupiers seeking opportunities to stretch their dollar.

The I.E.’s steady decrease in office vacancy rates is creating robust returns for landlords, in tandem with a healthy pace of positive net absorption (the balance between supply and demand). This allows office tenants to still participate in the competitive bid process for quality, vacant space.

The flight to the suburbs trend notably accelerated by COVID-19 circumstances is driving prospective homeowners and the labor force to the Inland Empire, which has been no stranger to decades of population growth. The region is fit to accommodate the influx with impressive infrastructure and amenities.


Open(ish) For Business; and the Rates Aren’t Bad Either

Geographically, the Inland Empire borders Los Angeles County to the northwest, Orange County (coastal/beach communities) to the southwest, and San Diego County to the south. It is no secret that these three neighboring counties are frequently named in the list of the most expensive places to live and work in California and the U.S. The Inland Empire has long been a respite of affordability for California’s largest pool of skilled, educated workforce, 43 percent of whom report commuting more than two hours per workday to their offices in Los Angeles or Orange County. In the mid-1980s, companies headquartered in Los Angeles and Orange County began to seize opportunities to expand to the Inland Empire, establishing an ever-growing footprint of regional offices to be closer to their employee base while taking full advantage of the economic incentives of a tertiary market. This, of course, spurred the interest of investors looking to develop or acquire assets in the region at attractive entry prices and competitive returns.

Market data today is evidence of this continued trend. Office lease rates in the Inland Empire are 34 percent lower than the national average, yet they have continued to climb by an average of 12 percent year-over-year since 2009. Similarly, the average office sale price per square foot in the Inland Empire is 37 percent lower than the national average but has grown 6.9 percent year-over-year for the past 12 years and is currently at a market record-high of $203 per square foot. (The previous market record-high was an average of $198 per square foot in third-quarter 2007.)

The Inland Empire’s rate of job recovery since April 2020 is outpacing the neighboring counties of Los Angeles, Orange and San Diego by 8 percent or greater. This is due to the essential nature of the majority of the Inland Empire’s labor force, 64 percent of whom work in healthcare, education, government and logistics. The current unemployment rate in the Inland Empire is the lowest in the State of California.

The affordability of the Inland Empire housing market remains incredibly competitive to its neighboring counties, although recent reports note that the housing market in the Inland Empire is now the “tightest housing market” in the United States. According to Zillow, the median price of a home in the Inland Empire is $482,348, while the median price of a home in Los Angeles and Orange County is nearly double, $954,500.


This Recession is NOT like the last

Despite the diminishing inventory of single-family homes available in the Inland Empire, and the encouraging decrease in vacancy in the Inland Empire commercial office market, there remains a healthy inventory of affordable, quality office space available for lease. Unlike the Inland Empire industrial market, developers have not been eager to bring new commercial office product out of the ground. For now, that is a good thing for the health of the Inland Empire office market. In hindsight, the extensive over-building of speculative commercial office product in the Inland Empire was a significant factor in the market’s demise in late 2007 and 2008. This cycle, the Inland Empire Office Market is in a stable position to absorb the bumps and bruises of a potential “downturn” thanks to conservative lending, responsible development, and the strategic acquisitions and dispositions of office assets by investors.

In 2012, 137,122 square feet of newly-constructed Class A office space was delivered in the Inland Empire – the first to be delivered since the “crash” four years prior. The project achieved the highest lease rates in the market, in excess of $42 per square foot annually, and was fully leased within 48 months. In February 2020, an additional 146,784 square feet of Class A office construction was delivered to the market, with an asking lease rate of $42 per square foot annually. Throughout the rest of the market, there remains 2.1 million square feet of quality office space available for direct lease, with 17 opportunities over 20,000 square feet of contiguous space and 9 opportunities over 30,000 square feet of contiguous space.


Flight to the suburbs is making the Inland Empire great again

Lee & Associates – Riverside along, with Petra Durnin of HelloOffice, reported that low-rise suburban office was poised to become the darlings of office real estate in summer 2020. This was evidenced by office occupiers looking to provide larger floorplates for their employees to collaborate at a safe distance while avoiding the mass foot traffic and crowded elevators of trophy high-rise assets.

Independent research organizations like Kastle Systems and PwC report that the longer the pandemic keeps employees working remotely, the more pent-up demand occurs from individuals who want to return to some resemblance of an in-person workforce when it is safe to do so. The U.S. Remote Work Survey performed by PwC and reported by our peers at Transwestern, indicates that 50 percent of executives anticipate a need to expand their footprint in commercial office space to accommodate social distancing, while only 30 percent of executives reported potential plans to downsize their footprint due to a long-term remote workforce.

The affordability, accessibility, and availability of suburban office product in the Inland Empire presents an attractive solution for executives looking to expand and stretch their dollar. It’s also attractive for those who want to switch to a hub-and-spoke model of regional branch offices located closer to their employee base. Not only does the Inland Empire offer their employees access to quality, affordable housing, but it boasts all the amenities characteristic of Southern California living. The Inland Empire features robust communities with parks, hiking trails, bike paths, vineyards, equestrian, designer retailers and award-winning school districts. As the Millennial generation settles into home ownership and family life, the Inland Empire will continue to see its population grow and economy thrive. COVID circumstances have already proven to be accelerating the flight to the suburbs in Southern California and across the country.

Certainly, this trend will continue to strengthen the Inland Empire’s reputation as a desirable place to live, work, build, and invest; and its attractive suburban office market will be a primary beneficiary.