Commercial real estate market activity increasing.

Vacancy rates drop, property values rise in 3rd quarter

The Inland Empire industrial market has been fueled by available and affordable land, labor and housing, combined with the area's excellent freeway access to the rest of California.

Currently, this is one of the few suburban markets that can accommodate immediate, competitively priced, large-scale industrial requirements, both for existing product and large build-to-suit land parcels.

The Inland Empire's total existing industrial inventory at the end of third quarter 1994 was 162.63 million square feet. This base includes buildings larger than 5,000 square feet.

Of this 162.63-million-square-foot base, there are 17.18 million square feet available for sale or lease, resulting in an overall Inland Empire industrial space availability rate of 10.56 percent. This rate is significantly less than the region's 13.86 percent industrial availability rate of a year ago.

Total industrial sales and leasing activity in the Inland Empire during the third quarter 1994 was 3.55 million square feet. This is down from third-quarter 1993's impressive activity of 5.08 million square feet. However, third-quarter 1994's activity was up significantly compared with second-quarter 1994's activity of 2.97 million square feet.

With this increase in activity, we saw a drop in the Inland Empire industrial vacancy rate from 11.13 percent at the beginning of the third quarter to 10.56 percent at the quarter's end. This continues the trend of diminishing supply in the Inland Empire.

As this trend persists, the Inland Empire will see increasing lease rates and sale prices, resulting in a healthy industrial market.

Western industrial market

The Inland Empire West submarket includes the cities of Chino, Fontana, Mira Loma, Ontario and Rancho Cucamonga. It was the first area to attract large amounts of speculative development and owner-built product, offering a full range of industrial buildings for sale and lease.

The Inland Empire West submarket contains 62 percent of the total Inland Empire industrial base. Activity has been consistently strongest in the west end, and the third quarter was no exception. These five cities accounted for 2.61 million square feet of industrial sale and lease transactions in the third quarter of 1994.

This is down compared to last year's third quarter of 4.28 million square feet of gross industrial activity.

Net absorption -- the amount of space leased during the period minus the amount of space vacated -- was a positive 882,050 square feet for Inland Empire industrial market during the third quarter of 1994.

The industrial vacancy rate for the Inland Empire West submarket is 9.67 percent, down from last year's 14.57 percent third-quarter 1993 rate.

Eastern industrial market

The Inland Empire East submarket includes the cities of Corona, Moreno Valley, Perris, Rialto, Colton, Riverside, San Bernardino, and Redlands. Small and mid-size, freestanding buildings comprise the majority of the market.

The Inland Empire East industrial inventory at the end of third quarter 1994 was 61.05 million square feet, and of this base, 7.36 million square feet was available for sale or lease. That translates to a vacancy rate of 12.05 percent, down slightly from 12.70 percent a year earlier.

Total gross industrial activity for the eight cities this quarter totaled 940,411 square feet, which is higher than third-quarter 1993's gross activity of 797,497 square feet.

Net absorption showed a positive 176,818 square feet during the quarter, illustrating some movement into the Inland Empire East submarket.

Office market overview

As California's fastest-growing region, the Inland Empire office market has been fueled by available and affordable land, labor and housing, as well as the area's excellent freeway access to the rest of California.

Representing one of the nation's most active marketplaces, it is one of the few suburban markets that can accommodate immediate, competitively priced office requirements.

The Inland Empire's total inventory of office space as of the end of the third quarter 1994 was 18.06 million square feet. This base includes buildings 10,000 square feet and larger.

Of this 18-million-square-foot base, there are 3.32 million square feet available for sale or lease, resulting in an overall Inland Empire office vacancy rate of 18.4 percent. This continues the stabilizing trend in vacancy rates, which have hovered in the 17-to-18-percent range since the third quarter of 1993.

Total office sales and leasing activity in third quarter 1994 was 143,197 square feet.

The stabilized office vacancy rate is an assurance that the downturn in the market is over, and the second quarter's comparable net absorption of 152,759 square feet illustrates continued movement into the Inland Empire.

Western office market

The Inland Empire West submarket includes the cities of Chino, Fontana, Ontario, and Rancho Cucamonga. The first area to attract large amounts of speculative development and owner-built product, it offers a full range of office buildings for sale and lease.

Containing 28 percent of the total Inland Empire office base, the Inland Empire West submarket includes 1.08 million square feet of office space for sale or lease out of a total base of 5.14 million square feet.

Net absorption for this area was a positive 34,939 square feet in the third quarter of 1994. The office vacancy rate for the Inland Empire West submarket as of the end of the third quarter was 20.99 percent, which is up slightly from second quarter's 18.90-percent rate. Although third-quarter net absorption was up significantly from the second-quarter's net absorption of 15,900 square feet, the vacancy rate increased due to an increase in the base and square footage available for lease or sale.

Eastern office market

The Inland Empire East submarket includes the cities of Colton, Corona, Moreno Valley, Perris, Redlands, Rialto, Riverside and San Bernardino. Encompassing 72 percent of the entire Inland Empire office market, the total Inland Empire East inventory of office space as of the end of the third quarter of 1994 was 12.92 million square feet.

Of this base, 2.24 million square feet was available for sale or lease. That computes to a vacancy rate of 17.36 percent. Meanwhile, net absorption during the third quarter showed a positive 108,258 square feet.

While net absorption is down slightly from the second quarter's 136,859 square feet of net absorption, the vacancy rate remained relatively stable when compared to second quarter's 17.59-percent rate, portraying a healthy office market.

A decrease in the office vacancy rate and an increase in office building values has been forecast for 1994, and should be evident by the end of the year.

Ontario becomes hotbed of expansion for warehousing, distribution companies

As the Inland Empire industrial real estate market raises its weary head and struggles to its feet after the worst of the economic recession is over, the city of Ontario has jumped to its feet and has taken off at a sprint-like pace.

Why is it that the Ontario market has done so well at not only recovering, but also at making up for the months of slower activity? From the beginning, companies have found the area attractive due to factors such as: good location, access to freeways, hospitable city government, state-of-the-art product, availability of labor, as well as its affordable homes and buildings.

Ontario is also home to the California Commerce Center, one of the largest master-planned industrial centers in California, with 2,000 acres of foreign trade-zoned land.

However, while these characteristics may contribute to companies favoring Ontario over its neighboring cities, it does not explain the increase in industrial activity that has been evident in that area (see accompanying table).

The industrial market of Ontario is dictated by the warehousing and distribution companies of which it is comprised and the decisions and actions of those companies. As the market strengthened and the nation's leaders promised that the recession was over, companies in the area began to be more optimistic about the future.

However, their decisions were not driven by the market as much as by their own internal needs. Forecasts have begun to project growth, and with growth comes expansion into larger buildings.

Along with the realization that the need for a larger building was in the near future came the recognition that the current "buyers' market" will not last forever. The supply of large REO sales is dwindling, as well as the inventory of competitively priced large industrial buildings.

"Already the area has experienced a monthly rental increase of a dime per square foot in big buildings," says David Consani, senior vice president and industrial specialist in the Riverside office of CB Commercial Real Estate Group Inc.

Companies are expanding: this past year Whirlpool, Sears, and Avery doubled their amount of space in Ontario, and other companies such as STS (distributor for Home Base) and Best Buys Electronics expanded into buildings that the previous group left behind.

Companies are also relocating to Ontario from other areas. "Access is the key to the success of Ontario," says Darla Longo, senior vice president and industrial specialist at the San Gabriel Valley office of CB Commercial. "Its central location is great for distribution to Las Vegas, Phoenix, and the rest of the western area. It also has newer, very functional buildings, with features such as 30-foot-clear height and extensive sprinkler systems."

Also, Ontario is one of the few markets with industrial-zoned land available for large build-to-suit development. Recent examples of such projects are the Toyota and Dunlop distribution facilities. "Another benefit of moving to Ontario is that lease rates are five to eight cents less than Los Angeles and Orange counties, which makes it an attractive industrial market," says Tony Archer, industrial information services researcher in the Riverside office of CB Commercial.

"Ontario has been doing extremely well for the last year or so," says Consani. "A macro view of the situation reveals a strengthening economy, increased demand, and a shortage of large buildings in the area."

The general economy of Ontario is heating up, as large retailers as well as durable and nondurable wholesale companies are gearing up for increased business. They are finding that their sales are increasing, and with this increase in business comes expansion in size.

Ontario has been known for its abundance of quality, large-scale buildings. However, since there has not been any new product built recently, there is a shortage of large buildings with more than 200,000 square feet of space. Companies are snatching the few large buildings left, and this has kept the Ontario market full of activity.

"Companies are finding that they need to be in California," says Longo. "For expanding companies, Ontario is an option to grow into; it is considered 'hot' because it is regarded as the next best alternative to Los Angeles and Orange counties in the Southern California area."

Horak is information services coordinator at CB Commercial Real Estate Group's Mission Square office in Riverside.