Inland Empire Warehouse Market Faces Oversupply, Rents Under Pressure

The Inland Empire, once a thriving hub for big-box and e-commerce logistics, faces an oversupply bubble impacting the warehouse market. According to Sun Life Financial Inc., the region's outsized development completions and extensive growth during the pandemic have led to an oversupply situation, putting downward pressure on achievable rents and cap rates.

This valuation pressure has been particularly evident in Sun Life's US real estate holdings, with their Inland Empire properties significantly contributing to the 4.6% quarterly and 15% year-over-year value decline. Randy Brown, Sun Life's chief investment officer and head of insurance asset management, acknowledged the area's cap rate and yield decompression, leading to a drop in achievable rents.

The oversupply situation in the Inland Empire is not unique to Sun Life. Prologis Inc., a major warehouse owner in the US, also lowered its 2024 earnings guidance due to lower average occupancies, with the leasing slowdown being most acute in Southern California and the Inland Empire.

Even with the difficulties, Randy Brown emphasized that Sun Life's properties in the Inland Empire are still fully occupied, with solid tenants and long-term leases. However, the office sector continues to experience negative valuation changes as the market seeks a floor, although the pace of these drops is slowing down.

Sun Life remains committed to its long-term real estate holdings, as most of its properties are mortgage-free, and the company has no intention of being a forced seller. While valuation changes can impact reported earnings, the impact may not necessarily be realized, and in many cases, it may never be.

Bottom Line

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Reference: "Oversupply bubble’ for Inland Empire warehouses?” by Bloomberg. Published on May 13, 2024.