SoCal Inland Empire's Retail Leasing Market Update

Although the weather is still hot as we approach the end of summer, leasing activity has certainly cooled down a bit.

In 2018, we experienced 5.3M square feet of leasing activity which was a little less than the 5.7M square feet that we averaged from 2011 to 2018. This year we are on track to have total leasing activity of 3.7M square feet which is 35% less than the average of the past 7 years. So what has changed?

Challenging Spaces: Many of the currently vacant spaces are challenging either because of CC&R limitations, zoning limitations, space sizes, the trade area, inexperienced ownership, or the difficulty of finding an unrepresented use in a center that already has 15 or more uses.

Lack of New Concepts for Certain Size Space: There is no shortage of fast casual restaurant users seeking 1,500 SF spaces in attractive, quality centers, but there are very few users seeking spaces over 5,000 SF. Other than the specific chain tenants that are known to most of us, the presence of large independent stores selling furniture, clothing, home improvement merchandise, sporting goods, and resale shops have declined substantially. Furthermore, the number of corporate users that typically occupied larger spaces has declined in the post internet world. The exceptions are grocery stores and fitness centers.

Demand Remains High for QSR:  Although quick service and fast casual restaurant demand remains very high, they all want the same space. Once that space is gone, they typically don’t want the alternative spaces that are available in the project.

Saturation of the Market: Tenants such as Ross, Marshalls, Harbor Freight Tools, Big 5, any many others have mostly saturated the market with their store locations. They are all being very selective when opening new stores as they are mindful of cannibalizing their existing locations.

We Might Just Be at Equilibrium: One of the main qualities that makes retail unique is its balance within a community. If office users find a certain trade area desirable, the market will allow for as much supply as there is demand and the demand can come from anywhere. The same is true for industrial. But for the majority of retail uses, the demand is limited by the buying power of the trade area.

Rents Are Rising: The good news for landlords is that rents have clearly risen in many centers. Owners recognize that if a space becomes available, and it is good real estate, they have one chance to maximize the rent because they will be committed to that rent for many years to come. The bad news for retailers and brokers, is if the space does not warrant the rent that the owner desires, a deal may not happen.

Despite this more challenging market, the Progressive Real Estate Partners leasing team remains aggressive and productive as we are being very selective in our projects to insure the greatest probability of achieving mutually beneficial results.