Long growth streak breaks as vacancies rise and sales slide.

AFTER growing at a blistering pace over the past few years, the Inland Empire's office and industrial markets finally saw a slowdown last quarter, with increased vacancy rates and dips in sale and lease activity and net absorption.

At the same time, the quarter ended with more than 23.5 million total square feet of under construction and, on the office side, Class A asking rents reached new record highs.

"We're still seeing an expansion of the industrial base in the two-county area. It's related to the activity at the Ports of L.A./Long Beach--it's classic consumerism," said Chuck Belden, senior vice president with Cushman & Wakefield. "The more tennis shoes, plasma screens and whatever is made in Asia is coming over here, being warehoused, distributed to stores, put on shelves and sold.

Even so, industrial rental rates fell two cents to 39 cents per square foot during the April-June period, according to Grubb & Ellis Co. The Corona/Norco submarket had the region's highest asking rents, 48 cents, while the Fontana, San Bernardino/Redlands and Colton/Rialto submarkets had the lowest rents of 36 cents. Sale and lease activity dipped overall to 5.6 million from 9 million square feet.

Meanwhile, vacancy rates climbed a point last quarter to 3.8 percent, the highest rate since late 2004, and a rise, Belden said, that is part of the natural cycle of geographically sprawling markets. "It's slightly up, but it's actually down in the Inland Empire west because there's no more land, and up in the east because there is land," he said.

The Rancho Cucamonga submarket was one of the few that saw a spike in sale and lease activity, thanks in part to the completion of Low & Archibald's Spectrum Business Park, a 230,000-square-foot industrial park on 13 acres. All 17 buildings were sold out upon completion for a combined $24 million.

Net absorption was down slightly to 3.9 million from 4.1 million square feet, but varied wildly between submarkets. Ontario absorbed 1 million square feet, more than double its absorption during the prior quarter. The small Montclair/Upland submarket increased its absorption eightfold to nearly 49,000, while Corona/Norco gave back 51,275 square feet.

The Moreno Valley/Perils area, with a 4.9 percent vacancy rate, saw nothing absorbed, most likely because the submarket has so little space available. Soon, however, there will be plenty. The area ended last quarter with 2.4 million square feet under construction. Developers also will break ground next quarter on a 1.7 million-square-foot spec building in Perils, which likely will become the largest spec building under construction in the country, Belden said.

In a major Inland Empire sale last quarter, the Warmington Group purchased the Chino Spectrum Business Center for $32 million from a joint venture of Birtcher Development & Investments and Hanover Financial Co. The center includes 12 buildings totaling 214,000 square feet.

The office market also saw its vacancy levels inch up to 7.6 percent during the second quarter, up from 7 percent during the prior quarter. The office market's net absorption fell from 412,412 square feet in the first quarter to 268,572 square feet during the April-June period.

"You can't do deals unless there's product. I don't see this as an indicator that our market's getting soft at all," said Vindar Batoosingh, senior vice president with CB Richard Ellis Group Inc.

Indeed, Class A rental rates climbed $0.10 to $2.09 last quarter while Class B rents dropped two cents to $1.78. Both class's rents were up about 10 percent from the same period a year ago--an indication of a strong market.

The Inland Empire, which currently has almost 20.7 million square feet of rentable office space, ended last quarter with just under 1.6 million square feet of new space in the pipeline. More than half of that development is taking place in the San Bernardino and Riverside submarkets.

LIZBETH SCORDO Contributing Reporter

Major Events:

* Low & Archibald completed Spectrum Business Park, a 230,000-square-foot industrial park on 13 acres. All 17 buildings were sold out upon completion for a combined $24 million.

* Warmington Group purchased the Chino Spectrum Business Center for $32 million from a joint venture of Birtcher Development & Investments and Hanover Financial Co.

* Developer Opus West finished the 115,000-square-foot Pine Corporate Center in Chino Hills. Last December, Opus sold 103,000 square feet of the project to various buyers for $25 million.