Inland Empire Office Market Workplace Shutdowns Take a Market Analysis

RESEARCH 2Q 2020 INLAND EMPIRE OFFICE MARKET WORKPLACE SHUTDOWNS TAKE A MARKET ANALYSIS

TOLL ON THE OFFICE MARKET Asking Rent and Vacancy • The average asking rent fell to $1.86/SF, although it remains up $1.90 25% slightly from the average of $1.84/SF a year ago. $1.80 20% • Airport and South County were the only submarkets to record $1.70 15% increases in asking rents, growing from $2.09/SF to $2.15/SF and from $1.71/SF to $1.79/SF, respectively, despite both submarkets $1.60 10% also recording modest increases in vacancy. $1.50 5% $1.40 0% • Vacancy climbed 50 basis points to 9.5% as the market posted net 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 2Q19 2Q20 absorption losses of 116,016 square feet due to the stalled business Average Asking Rent (Price/SF) Vacancy (%) climate during California’s stay-at-home order. Net Absorption (SF, Thousands) • Although leasing activity slowed, companies in the Inland Empire’s traditionally strong industries of healthcare and real estate 600 continued to make a few limited deals. 400 • Government budgets are expected to be hit hard by declining tax 200 revenues due to the fallout from the pandemic, and government agencies will see reduced real estate requirements as a result. 0

• Construction activity remains relatively high at 291,821 square feet -200 under construction across four properties. No new projects -400 delivered during the quarter, but construction sites remain open and 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 2Q19 2Q20 work continues, albeit with increased work-site safety regulations. Construction and Deliveries (SF, Thousands)

WEATHERING THE PANDEMIC 300 The office market slumped due to California’s public health shutdowns 240 of nonessential businesses and the resulting economic uncertainty. All 180 of the sectors that drive office demand in the Inland Empire have been 120 impacted to varying degrees: healthcare; education; government 60 agencies; and real estate. As businesses begin to cautiously reopen and 0 rehire furloughed workers, it remains to be seen how long it will take for 2Q15 2Q16 2Q17 2Q18 2Q19 2Q20 office demand to return to a new normal. The region’s role as a logistics Under Construction Deliveries hub does offer some resilience for the industrial sector, which will hopefully help support the economy during a period that has officially MARKET SUMMARY become a recession. Current Prior Year Ago 12 Month Quarter Quarter Period Forecast

Sales volume is down more than two-thirds for the quarter, with only Total Inventory 27.9 MSF 27.9 MSF 27.7 MSF   $52.4 million traded during the second quarter, compared to $97.2 Vacancy Rate 9.5% 9.0% 10.2%  million during the same quarter a year ago. Private investors continue to Quarterly Net Absorption -116,016 68,633 -208,743  make up the bulk of the buyer universe in the Inland Empire; virtually every purchase this quarter was made by a private group. What projects Average Asking Rent $1.86 $1.90 $1.84  did trade were either fully leased or owner-user sales, as value-add Under Construction 291,821 291,821 88,817  investors sit on the sidelines for the time being. Deliveries 0 13,809 0 

OUTLOOK The Inland Empire’s unemployment rate rose to 14.4% in April, Public health officials and business leaders are still recommending that representing the loss of 148,000 jobs since March, when California employees work from home whenever possible, which has dampened issued its stay-at-home order. While the retail industry was the hardest plans for new or expanded offices. hit, professional and business services also experienced a 10.0% decline in employment, with demand for office space suffering as a result. The The recovery of the office market depends on public sentiment, whether Inland Empire’s other two major drivers for office space, government employers and employees feel comfortable returning to traditional and education and health services, fared better but still lost jobs, with office workplaces and if new cases of coronavirus increase, which monthly declines of 4.2% and 2.6%, respectively. would lead to more economic uncertainty. A decrease in coronavirus patients is also necessary for the region’s healthcare providers to Riverside and San Bernardino Counties are allowing office-based recover, as emergency treatment of COVID-19 patients displaces businesses to resume, pending approval of workplace reopening plans. traditional clinical care, the industry’s main source of revenue.

EMPLOYMENT BY INDUSTRY PAYROLL EMPLOYMENT

Not Seasonally Adjusted Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change

Riverside-San Bernardino-Ontario, April 2020 Mining/Logging 10% 26.5% Construction 5% Other Services 6.5% 2.4% Information 0% 17.4% 3.0% Financial Activities -5% Manufacturing 6.7% Leisure/Hospitality -10% 10.1% 8.4% Government -15% 18.2% Prof & Bus Services Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Education/Health United States Riverside-San Bernardino-Ontario Trade/Transportation/Utilities Source: U.S. Bureau of Labor Statistics (Preliminary Data) Source: U.S. Bureau of Labor Statistics (Preliminary Data)

LEASE TRANSACTIONS

Tenant Building City Type Square Feet

Blue Tiger Recovery 73555 Alessandro Dr Palm Desert (Low Desert) New Lease 8,000

Robert Half 3633 Inland Empire Blvd Ontario (Airport) Renewal 7,177

Faith Electric 1980 Orange Tree Ln Redlands (San Bernardino) New Lease 6,358

Clark Pacific 4684 Ontario Mills Pky Ontario (Airport) New Lease 6,000

West End Family Counseling 9445 Fairway View Pl Rancho Cucamonga New Lease 5,877

SALE TRANSACTIONS

Building(s) City Sale Price Price/SF Square Feet

22555 Alessandro Blvd Moreno Valley (Riverside) $7,000,000 $479 14,616

Jefferson Commerce Building Temecula (South County) $5,139,000 $160 32,200

Tower Office Plaza Temecula (South County) $4,473,000 $127 35,101

Willow View Office Building Palm Desert (Low Desert) $3,400,000 $152 22,348

Chino Medical Center Chino (West) $3,084,000 $214 14,400

SUBMARKET STATISTICS Class A Class B Total Total Under Total Qtr YTD Asking Asking Asking Inventory Construction Vacancy Absorption Absorption Rent Rent Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)

Airport 8,140,602 0 7.4% -40,438 -33,022 $2.44 $2.01 $2.15

High Desert 808,106 0 7.4% 17,055 9,786 $1.87 $1.42 $1.30

Riverside 8,731,407 260,321 11.5% -20,361 -51,635 $2.29 $1.73 $1.85

San Bernardino 5,892,931 0 12.4% -87,032 14,652 $2.09 $1.51 $1.65

South County 2,538,284 0 6.1% -6,299 -15,427 $2.16 $1.65 $1.79

West 1,760,902 31,500 4.9% 21,059 28,263 $2.43 $1.65 $1.68

Inland Empire 27,872,232 291,821 9.5% -116,016 -47,383 $2.26 $1.74 $1.86

SUBMARKET BREAKDOWNS

Cities

Airport Fontana, Mira Loma, Ontario, Rancho Cucamonga

High Desert Victorville

Riverside Corona, Moreno Valley, Norco, Perris, Riverside

San Bernardino Colton, Loma Linda, Redlands, Rialto San Bernardino

South County Hemet, Lake Elsinore, Murrieta, Temecula, Wildomar

West Chino, Chino Hills, Montclair, Upland

DAIN FEDORA BRENT DON Director of Research Senior Research Analyst 213.596.2245 858.875.3623 [email protected] [email protected]

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research

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