Inland Empire industrial space gets hot in early '94; first-quarter deals total more than 2.7 million square feet.

Industrial space continued to be gobbled up in the Inland Empire during the first quarter of 1994, with more than 2.7 million square feet the space being leased or sold. That represents a dramatic increase from the 1.6 million square feet of industrial space leased or sold in the Inland Empire during the first quarter of 1993.

Vacancy rates for both industrial and office space in the Inland Empire continued to creep downward, build-to-suit activity increased dramatically and at least two companies announced plans to build speculative industrial projects.

Those developments and a host of big lease deals gave the Inland Empire commercial real estate community a strong boost to start off 1994.

"This year, we see a kind of rejuvenation, a revival," said Grace Wan, research director for the Ontario office of brokerage firm Cushman & Wakefield of California Inc., which compiles statistics for the industrial, office and research-and-development markets. "I'm not saying that's what's going to continue in the next three quarters. You never know with the stock market going up and down."

The Inland Empire market includes all of San Bernardino and Riverside counties. However, most of the recent industrial activity has been taking place in the Ontario Airport area, Mira Loma, Fontana, Montclair, Upland, Chino and Rancho Cucamonga. First-quarter 1994 industrial activity in the Inland Empire took a huge jump from last year's first-quarter activity of 1.6 million square feet.

Lease rates, which began firming up last quarter, continued to firm up, even rising slightly for large blocks of industrial space, Wan said.

Buildings with over 100,000 square feet of space had more than 1.6 million square feet of combined leasing and sales activity during the first quarter of 1994, more than double the amount leased and sold in the first quarter of 1993.

"We're out of big boxes - they're all gone," said Jim Center, a senior vice president in the City of Industry office of commercial brokerage firm Grubb & Ellis Co. "If you're looking to buy large blocks now, you're forced to look at land, and build something."

Center said land, which dropped in price 30 to 40 percent last year, is abundant in the Inland Empire. Most of it is owned by ailing developers and/or life insurance companies, which are willing to unload it in the $2-per-square-foot range.

"The pendulum is swinging fast," Center said. "It's going back from a buyer's market to a seller's market."

City of Industry-based Majestic Realty Co., which owns the 425-acre Majestic Spectrum business park in Chino, expects demand to remain strong for large blocks of space, said Majestic in-house broker Kevin McCarthy. The company, which industry sources characterized as "well funded," expects to break ground in June on two speculative industrial buildings. One will contain 435,000 square feet of space, the other 385,000 square feet. And both buildings have been designed to be state-of-the-art distribution warehouses.

"We're ready to do some more," McCarthy said. "We're very bullish."

Build-to-suits are expected to "increase dramatically," as companies search for larger blocks of space, said Wan.

"They'll find the Ontario Airport market has a lot of inexpensive, developable land," she said. "If a Fortune 500 company looks around for a warehouse, the L.A. Basin area doesn't have that much. The Ontario market is so good - close to an airport, close to major highways."

Two large build-to-suit projects that dominated first quarter 1994 include:

* City of Commerce-based Dedeaux Inland Empire Properties started construction of the two-building first phase of its 58-acre, $50 million project in Ontario, One building is an 823,000-square-foot warehouse being built to serve Sears Logistic Services, which is scheduled for completion in mid-June. The other building is a 220,000-square-foot building leased to Dart Warehouse Corp., slated for a mid-July completion.

The project's third building, which hasn't broken ground yet, is to be a 325,000-square-foot speculative structure, said owner Rod Dedeaux, the former University of Southern California baseball coach who now owns Dedeaux Inland Empire Properties.

* Metal Container Corp., a subsidiary of Anheuser-Busch Cos., bought 30 acres and started construction of a 350,000-square-foot can manufacturing plant in the Koll Mira Loma Commerce Center in the community of Mira Loma in unincorporated Riverside County. The project is valued at $150 million.

Thanks to several large deals in first quarter 1994, the Majestic Spectrum's Phase III, which totals 850,000 square feet of space, is 100 percent occupied, McCarthy said. The first-quarter deals at Spectrum include:

* The U.S. Navy signed a 10-year lease for 410,000 square feet of warehouse space for its Navy Exchange Command (NEXCOM), which operates on-base PX's that supply consumer goods to base personnel. The total value of that lease is $13.5 million.

* J.C. Penney Co. signed a five-year, $5 million lease for 300,000 square feet of warehouse space.

* Bandag Inc., which manufactures and distributes truck tire retreads, signed a five-year lease for 100,000 square feet of warehouse space. Total consideration was $1.8 million.

In another large first-quarter industrial deal, Heilig-Meyers, a furniture maker from Virginia, subleased a 320,000-square-foot distribution warehouse in Fontana for six years. The building was leased previously by electronics and appliance discounter Silo, which was later acquired by Circuit City. The sublease is valued at $6 million.

In the Inland Empire office arena, the vacancy rate at the end of the first quarter 1994 was 14.8 percent, a dramatic improvement from 25 percent a year earlier.

Mark McAdams, associate director at Cushman & Wakefield's Ontario office, said monthly rents for "Class A" office buildings are starting to pick up about 5 to 10 cents. Monthly rates for "Class A" space average $1.45 per square foot. Rates for "Class B" and "C" office rents have also leveled off, after suffering a sustained drop, he said. Class B monthly rents now range from $1.15 to $1.35 a foot, and Class C rents range from 90 cents to $1 a foot, McAdams said.

"One of the trends that I see is that we're running out of large blocks of office space," McAdams said. "If you're a 2,000-square-foot tenant, you can still find space. But if you're a full-floor or even if you just want 5,000 to 10,000 square feet, you don't have a lot of choices."

The only major office transaction in the works is the Riverside Redevelopment Agency's plan to acquire an 11-story, 160,000-square-foot highrise in downtown for $3.2 million from Bank of America. The building was formerly occupied by Security Pacific Bank, which was bought by Bank of America.

The project, called California Towers, is expected to be leased to the State of California, so the state can consolidate its existing Riverside offices into one building, said Robert Wales, executive director of the redevelopment agency.

The state plans to lease about 100,000 square feet of the building's 130,000 square feet of office space. The remaining office space will be used by existing tenants and some City of Riverside agencies that are currently housed at the city hall. A retail outlet and food court is planned for the building's remaining 30,000 square feet, Wales said.

The project is expected to be under construction by the start of the summer and ready for occupancy by early winter, Wales said.