Small-box industrial building demand remains red hot in the Inland Empire

Leasing activity in the Inland Empire's industrial market has experienced a decline, signaling a correction phase. Several factors contribute to this trend, including high rental rates, consolidation of unused warehouse space acquired during the pandemic, prevailing economic conditions, and increased selectivity among big-box occupiers.

Despite a significant decrease in leasing activity for big-box spaces, particularly those between 250K SF and 500K SF, down 54% from the previous quarter, property tours have remained robust. However, occupiers have become more discerning in selecting new sites, considering factors such as potential further drops in rental rates, concessions, and future consumer demand to determine their return on investment. An emerging trend is observed in buildings up to 50K SF, where demand remains strong, driven primarily by smaller local logistics and warehouse occupiers. Small-box leases have averaged 2.1 million square feet since 2023, marking a 29% increase compared to the 2022 average.

While demand for large-box buildings is expected to rebound, demand for smaller-box buildings is anticipated to remain stable. Contract negotiations at the East Coast ports expiring on Sept. 30th could lead to increased activity at West Coast ports if operators opt to relocate shipments to prevent logistical disruptions. This scenario could heighten warehouse demand in the Inland Empire as occupiers prepare for the upcoming holiday season, likely seeking additional smaller warehouse spaces to accommodate holiday shipments.