Sales and leasing fail to keep pace with new construction.

THE Inland Empire remained busy last quarter, with 9.5 million square feet of sales and lease activity absorbing a net 7.2 million square feet of space.

But even for the booming area developers may have been too optimistic, as sales and leasing could not keep up with the new construction, sending vacancy rates above 4 percent for the first time since 2004.

And it could well get worse before it gets better, with 21.3 million square feet of new industrial space under construction, according to Grubb & Ellis Co.

IDS Real Estate Group is building a 1.7-million-square-foot warehouse in Perris, the largest speculative industrial building under construction fight now in the U.S. And in Redlands, AMB Property Corp. is constructing the country's second-largest speculative warehouse, slated to reach 1.3 million square feet at build-out.

"It does look like there's going to be a pretty healthy supply out there by the end of 2007-and the rest is kind of up to the market," according to Tom Taylor, senior vice president, Colliers International. "The consensus among brokers is that big-box stuff is slowing, but there doesn't seem to be any lack of desire from the capital markets to buy that type of product."

Indeed, in an investment sale in Riverside, FR/CAL Sycamore LLC bought a 218,000-square-foot warehouse/distribution building from Magnon Holdings for $156 per square foot, totaling just over $34 million.

And in one of the largest deals of the quarter, tire manufacturer and importer Tireco bought a 1.1 million-square-foot building at Fontana's Sierra Business Park from Sares Regis for $76 million, or $69 per square foot.

On the leasing side, Broyhill Furniture Industries Inc. signed a five-year contract for 703,176-square-feet of warehouse and distribution space at Prologis Park I-210 in Rialto. Broyhill leased the space for 32 cents per square foot in a deal valued at $16 million.

But with so much new construction entering the market, some easterly areas saw spikes in vacancies during the third quarter. The Redlands/San Bernardino submarket's vacancy rate shot up almost 10 points to 14.8 percent last quarter, thanks mostly in part to the nearly 4 million additional square feet added to the submarket's base during the third quarter.

Office talk

Meanwhile, in the Inland Empire's office market, ground broke on new developments throughout the region. Vacancies were down slightly to 7.3 percent, and net absorption decreased about 25,000 square feet to 242,901.

"There's a little bit of a slow down, a flattening out, that we saw," said Tom Pierik, senior vice president, Lee & Associates. "People are kind of sitting on sidelines trying to figure out, especially in a growth area like this, 'OK, where are we going in the next 12 months?' But our vacancy rates still lowered in the third quarter, lease rates still went up. It's still really good."

Class A rents were up 2 cents during the July-September period, to $2.11, while Class B rents showed no movement, remaining at $1.78 over the last two quarters.

Office space under construction totaled 2.9 million square feet at the end of the third quarter, up significantly from the 1.6 million square feet under construction in the previous three-month period. More is on the way. Later this year Timberline Commercial Real Estate and SE Corp. are scheduled to break ground on the first phase of a 473,000-square-foot office project in Corona's Dos Lagos development.

The Ontario submarket's Class A office rents were up a nickel to $2.07 last quarter, with 1.15 million square feet of new construction in the pipeline. The Riverside submarket, which boasts some of the highest office rents in the Inland Empire--$2.28 the last two quarters--had 700,000 square feet of office space under construction.

According to Pierik, even if vacancy levels soften temporarily after the slew of new development comes on line, rents are still expected to rise given the high cost of land and construction builders face. "They're going to get what they have to get," he said, noting projected rates of $2.25 to $2.45 per square foot.

In other deals, California Commercial Investment purchased a 38,732-square-foot building in Riverside, Fairmount Office Plaza, for $7.4 million from GGC LLC. Nearby, LSA Associates and Inland Regional Center leased the first 50,000-square-foot building at the Grove office park. Construction on two more buildings at the project is under way.

Also, Ozburn-Hessey Logistics, a supply chain management company, signed a five-year lease for more than 260,000 square feet at the Majestic Airport Center in Ontario.

Major Events:

* Tire manufacturer and importer Tireco bought a 1.1 million-square-foot building at Fontana's Sierra Business Park from Sares Regis for $76 million.

* FR/CAL Sycamore LLC bought a 218,000-square-foot warehouse/ distribution building in Riverside from Magnon Holdings for just over $34 million.

* IDS Real Estate Group is building a 1.7-million-square-foot warehouse in Perris, the largest speculative industrial building under construction in the US.

* Broyhill Furniture Industries Inc. signed a five-year lease for 703,176-square feet of warehouse and distribution space at Prologis Park 1-210 in Rialto. Broyhill leased the space for 32 cents per square foot in a deal valued at $16 million.

By LIZBETH SCORDO

Contributin Reporter