inland empireindustrial marketsecond Quarter 2016

Real estate OutlOOk

In the second quarter 2016, the Inland Empire industrial market reported its highest quarterly net absorption figure since 2006. Due to the delivery of several projects which were build-to-suits or were started speculatively and subsequently pre-leased prior to completion, net absorption in the Inland Empire was nearly 8.8 million square feet. Despite a slowing in domestic growth in the first half of the year and economic headwinds from overseas, the US consumer continues to spend. As a result, industrial space in the Inland Empire remains highly sought after as users target greater efficiencies in scale as well as newer state-of-the-art facilities increasingly designed for e-commerce use.

economy

US economic growth continues to be steady at mid-year 2016With US consumer spending up 0.4% month over month and up 3.7% on an annualized basis in May, the domestic economy continues to expand despite mixed economic data both domestically and overseas. With the June PMI reading of 53.2 signaling an expansion in the US manufacturing sector, as well as a 4.0% year-to-date increase in combined TEUs for the Port of Los Angeles and Port of Long Beach, respectively, underlying economic fundamentals remain positive. Assuming the overall economy continues to grow, expect industrial space demand in the Inland Empire to also grow for the remainder of 2016.

Supply and development

Just over 14.7 million square feet is currently under construction At the end of the second quarter, a total of 11.7 million square feet was completed, of which 52% was delivered already leased. This brought 2016 year-to-date new construction up to 13.0 million square feet (up 69% from the first six months of 2015). Currently, there is just over 14.7 million square feet under construction, which is the lowest quarterly level of construction reported in two years. Of this amount, only 2.2 million square feet has been pre-leased, meaning that 85% of the space currently underway is being developed speculatively. The largest projects underway consist of Duke Realty’s 1.24-million-square-foot build-to-suit for Wayfair in Perris, Goodman Birtcher’s 1.0-million-square-foot spec building in Eastvale and Alere Property Group’s 1.0-million-square-foot building in Fontana. As long as leasing activity and net absorption remain steady, expect more developers to break ground in the second half of the year.

Inland Empire maintains strong industrial market fundamentalsVacancy up despite sharp rise in quarterly net absorption

tReNDliNes

5-YEAR TREnd CuRREnT QuARTER

vacancy

3.9%Vacancy up 20bps from Q1 2016

aBSoRptIon

8.8 million sF15 straight quarters of positive net absorption

Rental R ate

$0.49 PsFAverage rates up 11.4% year over year

undeR conStRuctIon

14.7 million sFLowest level of construction since 2014

cap R ateS

5.4%Cap rates up 50 basis points from Q1 2016

JoB GRoW tH

43,600 jobsMetro employment up 3.3% year over year

2 REAL ESTATE OUTLOOk inland empire industrial market Q2 2016

INLAND EMPIRE INDustRIAL MARkEtSecond Quarter 2016

demand

Record quarterly net absorption of 8.7 million square feet in the second quarter For the fifteenth consecutive quarter, demand for industrial space was positive. Led by the completed 1-million-square-foot build-to-suits for Medline, QVC, and Amazon in Rialto, Ontario, and Eastvale, respectively, net absorption was just over 8.7 million square feet of space. This brought year-to-date net absorption to just under 14.7 million square feet, which is up significantly from the 7.6 million square feet which was absorbed in the first six months of 2015. Leasing activity continues to be steady as corporate users seek out larger and newer buildings for more efficiency.

vacancy

Total vacancy rate up 20 basis points to 3.9% in the second quarter The total vacancy rate in the Inland Empire industrial market increased to 3.9% due to the amount of newly vacant buildings completed in the second quarter. In the Inland Empire-West, the total vacancy rate increased 20 basis points to just 2.1% while in the Inland Empire-East, the total vacancy rate increased 10 basis points to 6.2%. With 85% of all under-construction industrial space now being developed speculatively, expect a modest rise in vacancy levels over the next 12-18 months if there is any slowdown in leasing activity and net absorption.

Rental R ateS

Direct weighted average asking rates up to $0.49 per square footThe direct weighted average asking rental rate market-wide increased to $0.49 per square foot per month (up 11.4% year over year). Although industrial space demand has remained strong market-wide, the large amount of recently delivered vacant buildings and projects in the development pipeline has mostly kept average rental rates from increasing faster over the past 36 months. As a result, it appears that rental rate growth could slow in the short term although certain infill submarkets in the Inland Empire-West will continue to see increased rents as space availability there remains historically low.

CONsuMeR sPeNDiNG GROWtH

PuRCHasiNG MaNaGeRs iNDeX

1611 14131207 08 09 10 15

UNITED STATES

25

50

0

75

COMBiNeD PORt VOluMes

LOS ANGELES/LONG BEACH PORTS COMBINED MILLION TEUs

1611 14131207 08 09 10 15

15

0

20

10

5

SOURCE Ports of LA and Long Beach

SOURCE Institute of Supply Management

SOURCE US Dept of Commerce

UNITED STATES

1611 14131207 08 09 10 15

0%

-1.5%

1.5%

-1.0%

1.0%

Metro Inland Empire Industrial Market Indicators

PROPeRty Class iNVeNtORyuNDeR

CONstRuCtiONQ2 Net

aBsORPtiONytD Net

aBsORPtiONDiReCt

VaCaNCysuBlease

sPaCetOtal

VaCaNCyaVeRaGeRate PsF

Warehouse/Distribution 468,329,907 14,755,705 8,726,234 14,486,056 3.7% 0.1% 3.9% $0.49

Manufacturing 23,818,537 0 29,426 206,719 4.0% 0.3% 4.4% $0.56

ie Metro total 492,148,444 14,755,705 8,755,660 14,692,775 3.7% 0.1% 3.9% $0.49

REAL ESTATE OUTLOOk inland empire industrial market Q2 2016 3

InveStment maRKet

Year-to-date industrial building sales volume up 9.0% year over year The Inland Empire industrial market reported a total of $285.4 million in sales in the second quarter, which brought year-to-date sales volume up to $706.3 million (up 9.0% year over year). The largest sales of the quarter involved Clarion Partners acquiring 3900 Indian Ave in Perris from Sares-Regis Group for $54.0 million ($87 per square foot), as well as Industrial Property Trust acquiring 2200 San Bernardino Ave in Redlands from Ares Commercial Real Estate for $37.5 million ($100 per square foot). Well-located stabilized industrial buildings continue to be a favored property type on the part of many institutional investors, and as a result, pricing should remain high for any properties that hit the market for sale over the next several months.

outlooK

Expect strong market fundamentals to continue through the end of 2016 The Inland Empire industrial market at mid-year 2016 continues to see strong fundamentals as the US consumer has continued to spend despite mixed economic data and questions regarding the maturity of this business cycle. With corporate users remaining aggressive in both consolidating operations into larger and more efficient facilities combined with the growth in e-commerce requirements, expect industrial real estate market conditions in the Inland Empire to remain strongly positive through the remainder 2016. n

SOURCE: Name goes here

MetRO iNlaND eMPiRe Net aBsORPtiON aND VaCaNCy

16151407 08 09 10 11 12 13-3.0

0

3.0

6.0

12.0

9%

12%

6%

3%

0%

15%

9.0

NET ABSORPTION MILLION SF VACANCY

MetRO iNlaND eMPiRe ReNtal Rates Vs. CONstRuCtiON

16151407 08 09 10 11 12 130

10

20

30

$0.30

$0.40

$0.20

$0.50

UNDER CONSTRUCTION MILLION SF AVERAGE RENTAL RATE

MetRO iNlaND eMPiRe HistORiCal sales tRaNsaCtiON aCtiVity

1614 1507 08 09 10 11 12 130

200

400

600

800

METRO INLAND EMPIRE SALES VOLUME MILLIONS

SOURCE: Transwestern

SOURCE: Transwestern

SOURCE: Real Capital Analytics

Copyright © 2016 Transwestern. California Brokerage License #01263636. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.

InLAnd EMPIRE InduSTRIAL MARKETsecond Quarter 2016

Metro Inland Empire Industrial Market Indicators

MaRket aRea iNVeNtORyuNDeR

CONstRuCtiONQ2 Net

aBsORPtiONytD Net

aBsORPtiONDiReCt

VaCaNCysuBlease

sPaCetOtal

VaCaNCyaVeRaGeRate PsF

Inland Empire-West 280,874,765 8,875,329 4,643,944 6,511,954 2.1% 0.1% 2.1% $0.52

Inland Empire-East 211,273,679 5,880,376 4,111,716 8,180,821 5.9% 0.3% 6.2% $0.45

ie Metro total 492,148,444 14,755,705 8,755,660 14,692,775 3.7% 0.1% 3.9% $0.49

maJoR leaSe actIvIt y

PROPeRty teNaNt sF tyPe MaRket aRea suBMaRket

3300 Indian Ave Wayfair 1,244,874 Build-to-Suit Lease Inland Empire-East Perris

4880 Hamner Ave Amazon 1,033,192 New Warehouse Lease Inland Empire-West Eastvale

3655 E Philadelphia St Noble House Home Furnishings 741,458 New Warehouse Lease Inland Empire-West Ontario

701 S Arrowhead Ave Kohler 592,710 New Warehouse Lease Inland Empire-East San Bernardino

maJoR SaleS actIvIt y

PROPeRty PRiCe PRiCe PsF BuyeR MaRket aRea suBMaRket

3900 Indian Ave $50,400,000 $87 Clarion Partners Inland Empire-East Perris

2200 W San Bernardino Ave $37,500,000 $100 Industrial Property Trust Inland Empire-East Redlands

17300 Slover Ave $31,510,000 $100 LBA Realty Inland Empire-West Fontana

2553 Sampson Ave $20,393,500 $106 Industrial Property Trust Inland Empire-East Corona

development actIvIt y

PROPeRty sF tyPe DeVelOPeR MaRket aRea suBMaRket

Citrus Commerce Center (3 bldgs) 1,883,234 Class A Warehouse/Distribution Alere Property Group Inland Empire-West Fontana

3300 Indian Ave (Wayfair BTS) 1,244,874 Class A Warehouse/Distribution Duke Realty Inland Empire-East Perris

4890 Hamner Ave 1,007,705 Class A Warehouse/Distribution Goodman Birtcher Inland Empire-West Eastvale

15750 Jurupa Ave 970,747 Class A Warehouse/Distribution DCT Industrial Trust Inland Empire-West Fontana

MetHODOlOGy

The information in this report is the result of a compilation of information on industrial properties located in the Riverside-San Bernardino-Ontario metropolitan area. This report includes warehouse/distribution and manufacturing properties 10,000 SF and larger, excluding R&D/flex facilities and industrial condominium buildings.

CONtaCt

Michael SotoResearch Manager, Southern California213.430.2525michael.soto@transwestern.com

t 213.624.5700 F 213.624.9203www.transwestern.com/losangeles

601 S. Figueroa Street, Suite 2750Los Angeles, California 90017