Flight to Quality in Net Lease Market

The Inland Empire's industrial market is currently navigating a period of recalibration, with vacancy rates hovering around 7.2% to 8.2% at the start of 2026. This follows a significant delivery of new supply, with nearly 60 million square feet completed since 2023, creating more options for tenants. However, a sharp decline in new construction starts is expected to lead to a supply gap by late 2026, particularly for spaces larger than 50,000 square feet. Cap rates for Class A industrial properties in the Inland Empire have stabilized, ranging from 5.0% to 5.75% in the West and 5.5% to 6.25% in the East. This stabilization, combined with moderating rent declines, has created a window for investors to acquire assets before the anticipated tightening of the market. The average sale price for industrial properties in Los Angeles was reported at $312 per square foot in the fourth quarter of 2025. In the Los Angeles basin, the industrial market is also experiencing a cooling period, with vacancy rates reaching a decade-high of 4.9%. Landlords are offering concessions, such as free rent and tenant improvement allowances, not seen since before the pandemic, giving tenants more leverage in negotiations. Despite this, demand for Class A properties remains strong, with tenants prioritizing modern facilities. E-commerce and 3PL providers continue to be major drivers of demand in Southern California. E-commerce tenants are projected to account for nearly 25% of all new U.S. warehouse leasing in 2026. This is fueling demand for both large distribution centers and smaller, last-mile logistics facilities closer to urban centers. The Inland Empire East is emerging as a growth engine, attracting tenants with rent spreads that are $0.15 to $0.20 per square foot per month lower than in the West. This submarket saw over 2.1 million square feet of positive net absorption in the fourth quarter of 2025, driven by large-scale build-to-suit transactions and leasing from 3PL and corporate users. Looking ahead, market trends are expected to stabilize and improve throughout 2026 as new construction remains limited and absorption increases. Prologis, the largest industrial property owner in the Inland Empire with 85 million square feet, has an additional 3 million square feet in the pipeline to meet this anticipated growth in customer demand. The focus for investors and developers is shifting towards specialized industrial facilities, including infill logistics and advanced manufacturing spaces.