IE Demand Shifts from E-Commerce to 3PLs

The Inland Empire's industrial market is undergoing a significant correction, with the total vacancy rate surging to 6.8% in the first quarter of 2024, a 400-basis point jump from the previous year. This marks the seventh consecutive quarterly increase and has pushed asking lease rates down for the second straight quarter—the first time such a decline has occurred in over a decade. Net absorption has plummeted into negative territory, registering -5.4 million square feet over the last four quarters, a stark reversal from the preceding five-year annual average of positive 22.8 million square feet. The first quarter of 2024 alone saw a negative absorption of 2.2 million square feet, highlighting the significant decline in overall demand. A glut of sublease space is compounding market softness, with availability reaching an all-time high of over 18.5 million square feet. This surge is fueled by recent distribution center closures from major operators like the Maersk-owned Performance Team and NFI Industries, providing tenants with more options and negotiating leverage. Third-party logistics providers (3PLs) have firmly taken the lead in leasing, accounting for 38 of the nation's 100 largest industrial leases in the first half of 2025. This trend is particularly pronounced in the Inland Empire, where 3PLs represented nearly 59% of all big-box warehouse transactions in 2023 as companies increasingly outsource supply chain operations. Conversely, e-commerce operators have scaled back significantly, signing just seven of the top 100 leases in the first half of 2025, a dramatic drop from 31 during the same period the previous year. While overall e-commerce sales growth continues, its moderated pace has directly impacted the aggressive demand for distribution space seen in prior years. Despite the broader slowdown, leasing activity for mega-warehouses of 1 million square feet or more has accelerated. Five such deals were signed in Q1 2024, nearly matching the seven total mega-deals signed in all of 2023. The Inland Empire captured 15 of the top 100 largest industrial leases nationally in the first half of 2024, driven by large occupiers consolidating operations. The market shift is occurring amid a massive wave of new supply, with over 50 million square feet of industrial space completed since 2023, roughly 35% of which remains available. This influx has caused supply to outpace demand, though a recent slowdown in new construction starts may help the market move toward equilibrium. This tenant-favorable market is compelling landlords to adjust expectations and offer generous concession packages to secure quality tenants. For tenants with strong credit, current conditions present a favorable opportunity to negotiate lease terms and rents, potentially redefining market standards.