Inland Empire Business Activity Index
Winter | 2023
The Inland Empire Business Activity Index tracks performance of the Inland Empire regional economy on a quarterly basis and is adjusted for seasonal variations. The composite indicator is estimated using a wide range of economic data including employment, economic output, income, real estate, and other indicators at the national, state, and metropolitan level.
Business activity in the Inland Empire has continued to advance at a steady clip, which, after a slow start to the first half of the year, is in line with the recent increase in growth at the national level. The Center for Economic Forecasting estimates that business activity in the region increased at a 2.8% annualized rate during the 3rd quarter of 2022, roughly on pace with the growth of U.S. gross domestic product (GDP), which increased by 2.9%. Note that the 2.9% growth at the national level followed a weak performance in 2nd quarter GDP so there was more room for improvement. Economic indicators in the Inland Empire have continued to trend in the right direction. Weakness still remains in the real estate market, but has been offset by impressive increases in employment, the labor force, construction permit issuance, consumer spending, and improvements in commercial real estate.
In Focus: Commercial Real Estate
Non-residential construction in the Inland Empire continues to expand in the post-Covid economy. The local construction market is already benefitting from the positive effects of an improving local economy with virtually every underlying non-residential permit category growing in value. Despite workers now having an unprecedented ability to work remotely, permits for new office space increased nearly 380% in the Inland Empire, pushing the year-to-date total value of new commercial real estate 205.7% above 2021 levels. Moreover, existing firms have opted to improve and expand their space as illustrated by the increase in non-residential alterations and additions. Much of the current alterations/additions activity across the region are meant to improve the existing stock of commercial space and make these properties more desirable and competitive. Such projects will continue to propagate as the Inland Empire focuses on addressing its aging stock of commercial properties to adapt to the competitive pressures associated with new hotels, offices, and retail space.
Although building permit issuance has improved, certain segments of the Inland Empire’s commercial real estate market are clearly doing better than others. Although the office market continues to grapple with the changing face of office jobs, vacancy rates among office properties have been resoundingly unaffected and have increased only 0.2 percentage points since the first quarter of 2020. Indeed, the largest rise in vacancies has occurred in the retail segment, which has been disrupted by the rise in e-commerce spending. This is illustrated by the 0.6 percentage point rise in the retail vacancy rate, which has occurred from an increase in new stock (completions) and a decline in net absorption (change in occupied space). Perhaps unsurprisingly, warehouse and distribution has been the top-performing market in the local commercial arena, with the vacancy rate declining a massive 9.1 percentage points from the first quarter of 2020 despite nearly 35 million square feet of new space coming online during that time.
Looking ahead, nearly every major economic indicator in the region is moving in the right direction. The Inland Empire has added back almost 88,000 jobs since bottoming out during the pandemic, consumer spending is well above its pre-pandemic peak, tourism is returning, exports are growing, and the local population base continues to expand. The Center for Economic Forecasting doesn’t foresee see any major change in the path of the economy over the next 12 months and expects business activity to rise between 2% and 3%. As noted in earlier editions of this report as well as in other publications, the Center for Economic Forecasting is not predicting a near-term recession in the United States, unlike many other forecasting organizations. However, we certainly acknowledge that bad choices by policymakers in the months ahead could set a recession off. In particular, if the Federal Reserve continues to raise interest rates, rather than moderating, it could cause something to snap in the lending markets and tip the economy into a downturn. Today’s economy is indeed fragile and susceptible to a truly large negative shock. But that die is not cast yet.