Industrial Real Estate Market Trends: Colliers' Tom Taylor on the Inland Empire's Evolution

Written by:

Steve Marcinuk

Date:

01 Apr 2025

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“The nature of the building has to change further,” says Tom Taylor, Vice-Chair at Colliers. “Particularly in e-commerce, but they changed in general as the logistics industry became more and more sophisticated—the ceiling clearances got higher, the sprinklers had to be better. You had to have lots of big truck works, lots of trailer parking, lots of truck doors.”

With over four decades specializing in Southern California’s industrial market, Taylor offers a unique perspective on the Inland Empire’s development into one of the nation’s premier logistics hubs and where the market may be headed next.

From Entrepreneur-Owned to Institutional Dominance

One of the most significant shifts the industrial market has experienced is the evolution from entrepreneur-owned properties to institutional dominance.

“There was a time in my career when quite a bit of the industrial real estate was owned by entrepreneurs and families,” Taylor notes. “But at building values today, you don’t see as much of that. A 300,000 square foot building is a $100 million dollar deal. There aren’t many individuals doing $100 million dollar deals.”

This institutionalization coincided with substantial changes in the logistics business itself, particularly with the rise of e-commerce. These changes, coupled with rising property values and rental rates, have made the industrial sector increasingly lucrative.

“The buildings got bigger, the rents went up, the fees got bigger,” Taylor explains. “Historically, rents might have been 32 cents net for a 100,000 square foot building. That’s a much different fee than we see in a 500,000 square foot building at a dollar twenty.”

Current Market Conditions: A Tenant’s Market with Regional Variation

The current landscape, according to Taylor, heavily favors tenants—particularly in the Inland Empire East, where activity has been slower compared to the western region.

“Right now, it’s the tenant’s market. There’s quite a bit of product available,” he observes. “The rents reached a pinnacle probably in the beginning of ’23, late ’22, and have moved downwards about 30-35% since that time.”

Taylor points to significant regional variation within the Inland Empire market:

“Inland Empire West is getting more of the activity because the main tenants in the market have been Chinese third-party logistics companies. Most of those emanate out of the San Gabriel Valley and closer-in locations, so they tend to really want to be in the Inland Empire West. They don’t tend to want to go to the East.”

This has created a situation where “the Inland Empire West has really enjoyed most of the activity,” while the East has been “very, very slow.” The rent differential is substantial—properties that might have leased for $1.20 in the East are now commanding only 80 to 85 cents.

The Chinese 3PL Phenomenon: A Market Mystery

Perhaps the most intriguing current trend Taylor identifies is the outsized role Chinese third-party logistics companies are playing in the market—a phenomenon that even seasoned professionals don’t fully understand.

“We’re all scratching our heads a little bit on the activity level from the Chinese 3PLs,” Taylor admits. “If you ask 30 guys, no one’s gonna give you a good answer.”

Various theories abound: “They’re trying to get product in before the tariffs,” or “they’re taking business from the traditional 3PLs” like XPO and other established players. But Taylor notes that there’s “a little bit of mystery at market movement,” with some colleagues reporting they haven’t lost any listings to Chinese 3PL deals.

This contrasts with what Taylor describes as the notable absence of traditional large American companies in the market: “Your Fortune 500, your larger American companies have not been in the market now for a few years, where historically, they were the major part of all those types of companies.”

From “Just in Time” to “Just in Case” and Back Again

The COVID-19 pandemic and subsequent supply chain disruptions triggered a significant, if temporary, shift in warehouse strategy that has had lasting effects on the market.

“Prior to COVID, everyone was operating on a just-in-time formula,” Taylor explains. “Then this thing called ‘just in case’ came along—needing additional warehouse space so they could house product to beat the supply chain glitches. Now we’re back to a just-in-time formula because we’re not having the same supply chain issues.”

This transition is reflected in the data Taylor provides on sublease availability:

“At the peak in Q1 of 2024, we had 18,540,000 square feet of sublease space available. That was probably close to 3% of the base. After Q1, we’re down to 13,700,000 square feet.”

The cycle makes perfect sense: companies leased additional space during supply chain uncertainties, then released space they no longer needed as conditions normalized, flooding the market with sublease inventory that is now gradually being absorbed.

Velocity Picking Up: Signs of Market Recovery

Despite current softness, Taylor sees encouraging signs in recent leasing activity for larger industrial properties.

“Last year there were a total of 59 buildings leased over 200,000 square feet,” he notes, comparing this to historical patterns: “In ’23 there were 29, in ’22 there were 45, in ’21 there were 56, and in ’20 there were 60.”

More promising still is the start to 2025: “In January of this year, for buildings 200,000 square feet and bigger, there were 10 deals,” Taylor reports. “The velocity seems to be picking up and continuing on the same track as we did in ’24. So far, it hasn’t slowed down.”

A Shrinking Pipeline: Setting Up for a Potential Rebound

Perhaps the most significant indicator of a potential market turnaround is the dramatically reduced construction pipeline that could lead to supply constraints.

“The construction pipeline has really deteriorated,” Taylor observes. “This year there’s going to be a little over 10 million square feet of space delivered. But by the time you get to the end of the year, it’s like 2 million feet, and no one’s starting anything new.”

With vacancy at 6.8% and availability pushing past the 10.4% mark, developers have pulled back significantly. Historically, the Inland Empire market has added about 25 million square feet of new product annually. This year’s delivery of only 17 million square feet—dropping to minimal levels by year-end—represents a dramatic slowdown.

“It’s foreseeable with the velocity, even though we have a lot available, that because the deliveries are going to be much more anemic than the 20 to 25 million feet, that we will see rents reverse and start working back up the other way, if we enter a market condition where it’s a little tighter,” Taylor predicts.

Building for Tomorrow: Designing Against Obsolescence

In a market with continuous new development like the Inland Empire, Taylor emphasizes the importance of building beyond current standards to avoid rapid obsolescence.

“The Inland Empire has kind of a somewhat rapid obsolescence cycle, because there’s been land, and whenever there’s land, you could continually be adding new product to the market,” Taylor explains.

“If you’re building a building, you should build for the future. If you think you should build for today, you end up with something that’s an older building sooner than you would in most markets,” he advises.

This forward-looking approach involves several elements, with ceiling height being particularly critical. Taylor traces the rapid evolution: “It wasn’t long ago that guys were building 32 foot, and our client, Watson Land Company, was first to go 36 foot. Huge argument around 36 foot.”

Now, even that standard is becoming outdated: “In really big buildings, I have a 330,000 square foot in San Bernardino which is not even a huge building, and now that building is 40 foot. Now they’re starting to show up at about 42 foot minimum.”

For developers considering new projects when the market eventually rebounds, Taylor’s advice is clear: “If I were to build today, I’d probably build something 40 foot clear. That tends to be the sweet spot, but I’m starting to see 42 foot show up.”

Other key design elements include maximizing automobile and trailer parking. “Once you’ve built the building, you can’t really go back and redo those areas,” Taylor notes, emphasizing that institutional investors “want to be ahead of that obsolescence cycle” and value these features during disposition, even if current tenants don’t fully utilize them.

Emerging Asset Classes: Data Centers and Energy Storage

While the Inland Empire has dominated in traditional industrial and logistics, some emerging industrial asset classes haven’t yet taken hold.

When asked about data centers and industrial-scale energy storage facilities, Taylor notes: “We haven’t really seen that in the Inland Empire. I mean, we’ve had some battery storage companies looking around. I’m not aware of anyone making a deal.”

The infrastructure constraints present a significant hurdle: “In the Inland Empire, power is kind of at a premium, and just to get Edison out there to turn it on takes a long time. So I think those deals go to the places where there’s more power available.”

This stands in contrast to other markets where data centers have been a significant growth driver. “The top guy at Colliers the last two years [has been] in our data center [division]. That market’s hot,” Taylor acknowledges.