As the first quarter of 2025 wraps up it is clear that Southern California’s Inland Empire retail market is experiencing changing dynamics and faces some challenges and uncertainty going forward.
Before reviewing the factors driving these changes, let’s start with some basic stats regarding the retail market according to CoStar:
- The vacancy rate increased from 5.28% in the 4th quarter of 2023 to 6.25% as of April 1, 2025.
- Net absorption has declined in each of the past 4 quarters totaling a negative 1.1M square feet. It should be noted that this is the first time we have had 4 quarters of negative absorption in the past 20 years.
- While there was 4.3M square feet of total leasing activity in the past 12 months we are losing tenants faster than we are leasing space hence the negative net absorption.
- Average rents (across all types of retail property regardless of age, location, size, etc) has declined from $1.86/SF, NNN a year ago to $1.80/SF today.
- Total sales volume in the first quarter was $206M, which puts it at one of the 5 worst quarters in the past 10 years.
- Average cap rates across single tenant and multi-tenant properties have been all over the place the past 5 years and are currently at 5.5%. When reviewing the leased investments currently on the market, 40% are being marketed at a 6% cap rate or higher.
What do I think of this information and what am I hearing from our team members at Progressive Real Estate Partners?
1. Uncertainty is the Dominant Theme: Although I hate to be redundant from what you may have heard from others, people are feeling very uncertain about the future. Economists love to make predictions but in the past couple of months, I have attended a few conferences where even economists have stood in front of a room and refused to make predictions. To paraphrase these economists, “we just don’t know.”
2. Independent Tenant Interest Has Slowed: Our leasing team is reporting that they are still getting strong interest for their highest quality listings, but more marginal properties are receiving much less interest. They are also indicating that the quality of the inquiries has dropped. We are not sure if these are people that have lost jobs and are now contemplating “what’s next” OR we are more mindful of these inquiries since they are currently outpacing more serious inquiries.
3. There Are Still Active Box Users: In our recent leasing team meeting, active tenants included, but were not limited to, Grocery Outlet, Sprouts, Burlington, Vallarta, Savers, Stater Bros., Marshalls, Ross, Trader Joes, HomeGoods, and Daiso. Family entertainment centers such as Altitude Trampoline Park, Sky Zone, and Slick City are seeking sites. In the fitness realm, EOS & Chuze are also still active.
4. Tariffs & Immigration Policies Are of Concern: Given the current dynamics, we recognize that tariffs are likely going to reduce imports—at least in the short term—and since the Inland Empire is a “distribution mecca”, reductions in imports could cost jobs which hurts consumers. Immigration policy is also of concern since so much of Southern California’s growth is immigration dependent and a loss of undocumented and documented people could also be damaging to the local economy.
5. Single Tenant Cap Rates Below Debt Rates in Most Cases: Despite commercial real estate lending rates generally being in the low to mid 6% range, cap rates for high quality single tenant properties continue to trend below interest rate levels. We believe there are two reasons for this occurrence. First, although fewer than previous years, we continue to see 1031 buyers moving out of labor-intense properties to single tenant assets and frequently these require modest, if any, debt. Secondly, there are cash buyers who believe that the days of 5% interest in cash accounts are over, and they want to move their funds into real estate which not only benefits from cash flow, but also depreciation.
6. Multi-Tenant Cap Rates Rising: By comparison cap rates on multi-tenant properties are definitely moving higher since those buyers are more likely to put debt on the property OR at the very least, buyers believe they deserve higher returns for taking on the effort and vacancy risk of multi-tenant assets.
7. What’s Next? I’ve always taken pride in my ability to see 6 to 12 months ahead with some reasonable clarity. I make a concerted effort to stay informed by reading economic reports, talking with industry professionals, observing consumer behavior and listening to investors so I can process the information and look ahead. Unfortunately, at this juncture it’s just too difficult to anticipate what’s next. One thing I do know is that the business community hates uncertainty and there’s no shortage of it as I write this blog.
I’m also certain that, regardless of any challenges, the Progressive Real Estate Partners team knows the Inland Empire market inside and out and we will adapt as needed to provide our industry partners and clients the best guidance available. Lastly, I welcome any positive (or negative) anecdotal information that you might be experiencing or hearing from others. Sharing information is how we all get better together and part of what makes the commercial real estate community so resilient. You can always reach me at brad@progressiverep.com.