Economic uncertainty dampens industrial sales, leasing activity. (Real Estate Quarterly--Inland Empire).

LINGERING economic uncertainty slowed activity in the Inland Empire during the third quarter, as the number of sales and leasing deals declined after a robust first half of 2002.

The vacancy rate climbed to 7.9 percent from 7.6 percent in the second quarter as brokers closed deals on only 6.2 million square feet of space, down from 10.3 million and 11.1 million during the second and first quarters, respectively, according to Grubb & Ellis Co.

Brokers said that retailers and manufacturers are hesitant to lease or buy large amounts of warehouse and distribution space due to the uncertainty caused by everything from the stock market to a possible war with Iraq.

"We just haven't seen the amount of users coming out here as we have in the past," said Chuck Belden, senior director at Cushman & Wakefield of California Inc. "It's a litany of issues that taken as a whole are rather daunting for the American economy."

Reducing the vacancy rate during the remainder of the year will be a challenge, brokers said.

A 750,000-square-foot building that came on the market during the second quarter in the Majestic Airport Center at 2950 Jurupa St. in Ontario remained empty.

Two other buildings--838,302 square feet in the Jurupa Business Park at 13052 Jurupa Ave. in Fontana and 857,000 square feet in the Airport Mission Project at 1151 Mildred St. in Ontario-came on the market during the third quarter.

"There may be more wait-and-see time on the larger deals," said Mary Sullivan, Grubb & Ellis' client service manager. "We place the tenant in the building based on their space requirement."

As a result, annual leasing rates in this traditional industrial hub fell to $3 to $3.90 per square foot in the third quarter, from $3.50 to $4.30 during the previous quarter.

Nearly every transaction during the July-September period was for a building smaller than 200,000 square feet--a contrast to the second quarter when most of the activity involved buildings 200,000 to 400,000 square feet.

One of the few large deals involved Tyco Healthcare Group, which signed a six-year lease in July for an undisclosed sum on 408,252 square feet of space in the Ontario Ridge Commerce Center at 3655 E. Philadelphia St. in Ontario.

FAO Schwarz committed $3.8 million in July for a five-year lease on 219,518 square feet of warehouse space in the Haven Gateway Centre at 3980 Earlstone St. in Ontario.

Schwarz Paper Co. made a $4 million commitment in July to lease 186,960 square feet of distribution space for seven years in Rancho Cucamonga Corporate Park at 8449 Milliken Ave. in Rancho Cucamonga.

Mission Plastics Inc., a plastic injection molding firm, bought a 163,336-square-foot parcel of industrial land at 1930 South Parco Ave. in Ontario in August for an undisclosed sum.

"(Third quarter) is historically the lowest quarter for industrial activity;' said Ron Washle, senior vice president of Grubb & Ellis. "People were on vacation. Now they are back."

But they returned to a warehouse owner's worst nightmare--a 10-day closure of the 29 West Coast ports by the ship companies in response to work slowdowns staged by the International Longshore and Warehouse Union.

"(The industrial market) has grown so much because of the growth at the ports," said Belden. "(Labor unrest) is not helping at all."

While the overall market is not expected to improve this quarter, brokers held out hope that vacancy rates would at least drop, as the 6.8 million square feet of space under speculative construction in the third quarter remained unchanged through mid October. No major increases were expected through the rest of the year.

"There will not be a mad rush of new construction during the last two months of the year," said Sullivan.

In the less significant office market, vacancy rates dropped to 11.9 percent, from 13.1 percent in the second quarter.

Brokers attributed the decline to a lack of available space. They leased and sold only 177,011 square feet in the third quarter, down from 228,021 in the previous quarter.

Major Events:

* Tyco Healthcare Group signed a six-year lease on 408,252 square feet of space for an undisclosed amount in the Ontario Ridge Commerce Center at 3655 E. Philadelphia St.

* FAQ Schwarz signed a five-year, $3.8 million agreement in July on 219,518 square feet of warehouse space in the Haven Gateway Centre at 3980 Earlstone St. in Ontario.

* Schwarz Paper Co. paid $4 million in July to lease 186,960 square feet of distribution space for seven years in Rancho Cucamonga Corporate Park at 8449 Milliken Ave.

* Mission Plastics Inc., a plastic injection molding firm, bought a 163,336-square-foot industrial parcel at 1930 South Parco Ave. in Ontario for an undisclosed sum.

[GRAPH OMITTED]