Inland Empire bucks downturn with new projects; popularity of 'super stores' fuels wave of construction.

Contrast marked the Inland Empire real estate market during the fourth quarter, as a number of projects got under way despite the generally sluggish commercial real estate market.

Rancon Financial Corp. announced plans for a 51,200-square-foot retail center and completed a 72,000-square-foot speculative office building, for example, while Smith's Food & Drug Centers Inc. started construction of a 1 million-square-foot distribution center in Riverside.

The newest of the projects is Rancon's Phase II Promotional Retail Center at Tri-City Corporate Centre in San Bernardino, where construction is slated to begin this month.

Steve Palmer, vice president of marketing for Rancon Realty Funds, a Rancon development-related subsidiary, said pet food retailer PetsMart and computer retailer CompUSA have already signed leases for the center. PetsMart will occupy 25,000 square feet and CompUSA 23,000 feet. Palmer said the remaining 3,200 square feet will be multi-tenant space.

The new phase-two center is targeted to be built adjacent to the first phase of the Tri-City Promotional Retail Center, where Home Depot and Office Club are the lead tenants.

Rancon said one reason the center has attracted tenants is its frontage on the San Bernardino (10) Freeway.

Rancon's recent leases are also further evidence of expansion in one of the few growing segments of retail leasing -- the so-called "super stores," which are warehouse-style retail outlets that typically specialize in one product type.

PetsMart, for example, operates 52 super stores in 13 southern and western states and has announced plans for up to 60 more, many in California. CompUSA has 303 stores and has announced plans for 48 more.

Rancon's 72,000-square-foot office building also is at Tri-City Corporate Centre.

Called "One Parkside," that four-story building opened last October. Its two major tenants are New York Life Insurance Co. Inc., with a little more than 10,000 square feet, and the law firm of MacLachlan, Burford & Arias, with approximately 16,500 square feet.

Palmer said Rancon bucked the trend in building the speculative office space because the company saw "a demand for quality new office product with large, contiguous leasable space."

Yet about three months after completion, One Parkside remains 63 percent empty.

According to commercial office brokers, the demand for such office space in the Inland Empire may actually be higher than the numbers would make it appear.

The Inland Empire posted a 22 percent office vacancy rate at year-end 1992, a slight improvement from its 23 percent vacancy a year earlier. "Net absorption" for the year decreased to 630,000 square feet or, more simply put, Inland Empire office tenants leased 630,000 square feet more space than they vacated in 1992. That compares with 763,000 square feet of "net absorption" in 1991, according to commercial brokerage firm Grubb & Ellis Co.

But Grubb & Ellis also noted that the relatively small size of the Inland Empire office market, 12.5 million square feet, means that it could "experience a sharper drop in its vacancy rate than larger, more mature markets" if leasing picks up.

"From a leasing perspective, the Inland Empire (office market) was one of the last markets to experience the downturn, and the downturn has not been as severe," Grubb & Ellis stated in its year-end report.

On the downside, financing for commercial sales has all but disappeared and "will take longer to return, due to the small size and suburban nature of the market," the brokerage firm reported.

Just as the Inland Empire's office vacancy rate remained virtually flat in 1992, dropping just 1 percent, so did its monthly rental rates, which hovered at about 80 cents to $1.90 a square foot.

Les Copelin, an office specialist with Grubb & Ellis, said one change since the downturn began is that the influx of companies from Los Angeles and Orange counties has slowed because rents have decreased in those markets, making Inland Empire rates less of a bargain than they used to be.

But the moves are continuing, as indicated by Aetna Life Insurance Co.'s lease of 47,682 square feet at Riverside Metro Center.

Michael O'Brien, a broker with CB Commercial Real Estate Group, said the five-year Aetna lease, valued at more than $3.5 million, was "the largest office building lease in the City of Riverside in the past six years."

O'Brien, who represented building owner RMC Realty Inc. in the deal, said Aetna will use the space for a claims processing center to consolidate existing operations from several Southern California communities.

In the Inland Empire's industrial market, which includes approximately 120 million square feet of space, the vacancy rate dropped to 18 percent at the end of 1992, compared with 21 percent at the end of 1991, Grubb & Ellis reported. It attributed the improvement to the lack of new construction except for build-to-suit projects like the Smith's Food distribution center.

Shelly Thomas, a spokeswoman for Smith's, said construction began in November on the $60 million, 80-acre center in Riverside. She said the center will employ about 450 workers and include a dry-grocery warehouse, a dairy and a warehouse for perishable foods. Thomas said the dry-grocery warehouse is scheduled to open in August, the perishables warehouse in October and the dairy in January 1994.

Brokers said that, with few exceptions, build-to-suit projects like Smith's center represented the only new construction in the market.

Late in the third quarter, for example, construction began on a 51,000-square-foot Amtrak regional sales and reservations center in Riverside.

Bruce Heard, an Amtrak spokesman, said the center will consolidate two existing facilities -- one on Olympic Boulevard in downtown Los Angeles and the other in the Orange County city of Corona.

The new Amtrak center is scheduled to open this summer, Heard said.