Asking rents break records even as vacancies level off.

THE Inland Empire's booming office market kept growing last quarter as asking rents for office space reached their highest levels in recent memory, even as vacancy rates leveled off.

Class A rents rose two cents to $1.99 during the January-March period, up from $1.88 at the end of the first quarter of 2005. Rents for less pricey Class B space did even better: up 11 cents to $1.80 and up 20 cents from the same period a year ago, according to Grubb & Ellis Co.

Vacancy rates remained the same over the past two quarters, at 7 percent, but that was down from 8.4 percent a year ago.

The annual influx of 100,000 new residents into the Inland Empire has played a huge role in the growth of its office market, said Tom Pierik, a principal with Lee & Associates.

"There's a tremendous amount of internal growth within companies already here, but you also have the groups from L.A. and Orange County coming into this market," Pierik said. "A lot of companies, once they get here, this market exceeds their expectations from a labor standpoint and they grow faster than they had originally anticipated."

While lower real estate costs still play a role in a firm's decision move to the region, more importantly, companies gain a 5 percent to l0 percent competitive wage advantage over their counterparts in Los Angeles or Orange counties.

A prime example of the dynamic: Ameriquest Mortgage Co., which leased 50,000 square feet in Ontario in 2004 and by the end of 2005 had grown its Inland Empire presence to 250,000 square feet.

"There's a tremendous appetite among these local employees to stay and work locally," said Pierik. "They may make 5 percent to 10 percent less, but that person is spending 20 to 25 minutes commuting everyday compared to an hour and 20 minutes."

The torrid appetite for office space also was oddly reflected in a slowdown in net absorption--down 10 percent from the fourth quarter to 412,412 square feet. That was due in part to the market's lack of new product last quarter--a problem that will be solved when the 2.1 million square feet of new office space under construction in the first quarter comes online.

The slew of new development should not have much of an effect on the market's vacancy rates or rents, Pierik said, noting the Inland Empire has brought nearly 2.3 million new square feet of new office space to market over the past two years and has still enjoyed an increase in lease rates.

"The bottom line is our land cost and construction costs are significantly more than expensive than 12 and 18 months ago," he said.

Among the region's submarkets, Ontario's proximity to the San Bernardino (10) and Ontario (15) freeways and the Ontario Airport, as well as the area's available office parcels, has made it particularly popular with developers.

Ontario accounted for nearly 40 percent, or 829,000 square feet, of the Inland Empire's total office construction under way. The submarket's vacancy rate fell by more than a point last quarter, to 3.8 percent, the lowest rate in the region.

The region's major office deals last quarter included the sale of two Riverside office properties by CT Realty of Newport Beach. Triple Net Properties, based in Santa Ana, bought Mission Square, a 127,500-square-foot building Class A property for $33.5 million, while a Los Gatos private investor purchased a fully-occupied 67,000-square-foot office building at 1595 Spruce St. for $9 million.

On the industrial side, the market remained relatively steady. The quarter ended with a 2.8-percent vacancy rate, up slightly from 2.7 percent during the previous quarter, but down from 3.6 percent a year ago. Three Inland Empire submarkets: Fontana, Montclair/Upland and Corona/Norco ended the quarter with vacancy levels under 2 percent.

"We're still running at very low vacancy which speaks well for the economy and what we have going," said Roger Rhoades, senior vice president, industrial services, Grubb & Ellis. "We can still sell small buildings very rapidly to owner/users because we still have favorable interest rates even though they're creeping up."

The fourth quarter also ended with a whopping 22.8 million square feet of industrial space under construction. Among the new construction, Medline Industries, a medical supply firm, contracted with Hillwood Development Corp. for a 405,000-square-foot distribution center at Hillwood's AllianceCalifornia development in San Bernardino. Construction is scheduled to finish in September.

Eastern submarkets also are gaining in popularity as they have much larger available parcels of land than Inland Empire submarkets closer to Los Angeles. But in some cases industrial tenants are simply chasing the low rents east.

"Tenants still want to enjoy the low-30 cent rents," Rhoades said.

The eastward trend is reflected in the Fontana submarket's steadily decreasing vacancy rates. Fontana ended last quarter with a 1.1-percent rate, down from 2.4 percent during the previous quarter and from 5.6 percent during the first quarter of 2005. The Fontana area has 5.4 million square feet of industrial construction under way.

Major Events:

* Santa Ana-based Triple Net Properties bought Mission Square, a 127,500-square-foot Class A property in Riverside, for $33.5 million from Newport Beach-based CT Realty.

* Wells Fargo Home Mortgage Inc. took 231,000 square feet at North Pointe, a San Bernardino development slated for completion in May of 2007.

* LNR Property Corp. and the Lewis Group built two 1.1 million-square-foot distribution facilities at Fontana's 198-acre Sierra Business Park.

* Home improvement retailer Lowe's leased 508,000 square feet of warehouse/distribution space in Moreno Valley from Alere Property Group for 33 cents triple net per square foot.