Inland Empire industrial market stays robust in 1993: but area's office, industrial activity could slow in '94.

Several large industrial deals kept the Inland Empire market churning in the fourth quarter last year, while vacancy rates continued to come down. But experts are forecasting less activity and sluggishness in industrial and office markets throughout 1994.

Industrial sales and leasing activity remained healthy in 1993, with more than 11.5 million square feet of combined activity. That was just behind 1992's pace of 13 million square feet. The rate is expected to drop to 9.5 million square feet in 1994, brokerage firm Grubb & Ellis Co. predicted.

The west end of the Inland Empire, which includes the Ontario Airport submarket, Mira Loma, Fontana, Montclair, Upland, Chino and Rancho Cucamonga, was the most active area, controlling 65 percent of the activity for the year, said Mary Sullivan, research director for Grubb & Ellis in Ontario.

"They have the majority of the existing product," she said. "They've also had more of the larger building deals. And they have the airport."

Demand for large chunks of industrial space continued, bringing significant deals to the area.

"The activity has been strictly in certain size categories, the 300,000 (square feet buildings) and above," said Kevin McCarthy of City of Industry-based Majestic Realty Co., which owns the 425-acre Majestic Spectrum business park in Chino. "There's a limited supply of those buildings in the marketplace." In the past 60 days, Majestic Realty has closed three lease deals at the Spectrum, totaling 1.1 million square feet.

Large industrial deals -- four topping 400,000 square feet each -- dominated the second half of 1993. Those deals were done in the late third quarter and fourth quarter.

The largest deal was the Mercedes-Benz of North America Inc. purchase of 444,000 square feet on Bar Harbor Road in Fontana for $6.7 million. The building was a REO (real estate owned) property owned by RT Capital Corp. and had been vacant since it was built in 1991. Mercedes relocated from a 166,000-square-foot parts distribution center in La Mirada as part of its expansion. Other large industrial deals transacted in recent months:

* Avery Commercial Products Division, the office label company, signed a seven-year lease for 410,208 square feet in the former L.A. Gear Inc. distribution center on Jasmine Street in Fontana. Total consideration was $8.6 million. Avery consolidated two operations, including a warehouse in Ontario, into the building.

* Crown Zellerbach, a division of Ohio-based Mead Corp., signed a five-year lease worth more than $7 million for a 400,000-square-foot building in Chino. The company moved from Los Angeles to the Majestic Spectrum. The building, which was developed and built by Majestic Realty, is one of the few "spec" buildings recently built in the Inland Empire. Spec, or speculative, buildings are those built with no preleasing or purchase commitments from tenants or users. Majestic's spec building was completed last April. The company is now building two additional spec buildings, one with 435,000 square feet of space and another with 385,000 square feet. The company has not yet determined a completion date for these buildings.

* General Electric Co. signed a 15-year lease in a 405,000-square-foot build-to-suit in Ontario for its lighting division for a total consideration of $27.5 million.

* J.C. Penney Co. signed a five-year lease for 300,000 square feet in the Majestic Spectrum. The lease is valued at an estimated $5 million, according to an industry source familiar with the deal.

* Hamilton Fixture West bought a 252,000-square-foot building on Philadelphia Street in Ontario for $5.5 million. The building had been foreclosed on by its lender, Glendale Federal Bank. Hamilton relocated its manufacturing operations from Brea.

* Sweetheart Cup Corp., a paper-cup manufacturer, signed a 54-month lease for 249,000 square feet on Malaga Place in Ontario, moving from Vernon. The lease was valued at $3 million.

* Sportmart Inc. signed a five-year lease for 202,520 square feet on Marlay Avenue in Fontana, moving from the state of Washington. The lease was valued at $2.5 million.

For the Inland Empire market as a whole, the industrial vacancy rate fell by 3 percent during 1993, closing the year at 16.4 percent. Just under 20 million square feet of industrial space is available. The rate is expected to fall to 14.5 percent in 1994, according to Grubb & Ellis.

Raw land prices, which dropped about 30 to 40 percent last year, will continue to decline, attracting large companies to buy land and build their own buildings, said Jim Center, a senior marketing consultant with Grubb & Ellis.

"Land prices are still coming down," Center said. "We don't know where the bottom is. We've had significant foreclosures of land, probably 2,000 acres that have gone through the foreclosure process and been taken back by the lenders." Brokers said land that used to cost $5 to $6 per square foot now is selling for $2 per square foot.

And land is plentiful in the Inland Empire, most of it owned by ailing developers or life insurance companies that want to unload it.

Total sales and leasing activity is expected to drop slightly in 1994, Sullivan said.

"Activity may be down a bit because the last few years have been so exceptionally strong in response to low rental rates," Sullivan said. "And because of all this large, big-box activity, we are definitely lessening our supply. It's still going to be a questionable economy."

Large manufacturers are staying away from Southern California, which is why most of the industrial growth in the Inland Empire has been in distribution, Center said.

"Most of the manufacturing deals that are going on are local or regional companies, not national," Center said.

Meanwhile, office activity remained flat in the Inland Empire. "Net absorption" through the end of 1993 dropped off to 343,000 square feet, down from 592,000 square feet the previous year. Net absorption is the amount of space leased minus the amount vacated.

The Inland Empire's office vacancy rate was 21.7 percent at year end, relatively unchanged from the 1992 year-end rate of 21.9 percent. However, the current rate is an improvement from the 1989 high of 25 percent.

Office sales and leasing activity remained unchanged from 1992, and there was no new office construction in 1993, Grubb & Ellis reported.

"In the Inland Empire, the office market is very young," Sullivan said. "So the base is much smaller than the surrounding areas."

Areas such as Orange and San Diego counties are fighting to retain their existing tenants, Sullivan said.

"That will change when the economy picks up," she said. "We're definitely the path of growth out here."

Monthly office rents are expected to remain consistent -- from 70 cents to $1.90 per square foot. That anticipated stabilization of rents comes after a drop of 15 to 20 percent in 1992, followed by an additional drop of 10 to 15 percent in 1993, Sullivan said.

Some specific pockets of office space -- such as the Hunter Park area in Riverside, downtown Riverside and the area of San Bernardino where the San Bernardino (10) and Barstow (215) freeways intersect -- have had higher absorption and are stabilizing, Sullivan said.