Slow Start Doesn't Dampen Outlook for Industrial Deals.

THE demand for warehouse distribution space in the Inland Empire appears insatiable, looming recession or not.

Though gross sales and leasing activity was off from the record highs of the fourth quarter of 2000, when 10.8 million square feet of Inland Empire industrial space was taken off the market, the first-quarter action was robust, according to Grubb & Ellis Co.

More specifically, almost 7 million square feet of industrial property was sold or leased in the period. While. that activity level is down, brokers said it is in line with the historical trend of slower starts to each new year. The average asking lease rate for Inland. Empire Industrial space held steady during the first quarter at about 47.5 cents per square foot per month.

But with the region being home to scores of corporate distribution centers, economic cracks are inevitably surfacing -- as tenants start putting blocks of space up for sublease.

"We are seeing companies give back space," said Chuck Belden, an agent and director at Cushman & Wakefield Inc. in Ontario. "That being said, the activity level is still very strong."

Indeed, the vacancy rate dropped from 7.8 percent at year-end 2000 to 7.2 percent at the end of the first quarter, according Grubb & Ellis. However, construction tailed off to 13.2 million square feet, off from the torrid fourth quarter pace when hard hats were at work on 16.3 million square feet.

But recent census figures indicate the region is poised to continue with rapid growth rates well into the future, and Belden said the market is showing new maturity in line with that as development spreads out.

"Land opportunities have diminished in and around the (Ontario) airport area," he said. "You are now going to see more development in the high desert, the East Valley, the 215 corridor, the lower San Joaquin Valley market."

Some the biggest deals of the first quarter were vehicle related. Cooper Tire & Rubber Co. leased about 401,000 square feet of space in the Cabot Distribution Center in Rancho Cucamonga. The 10-year lease was inked at 29.5 cents per square foot per month.

Volvo, now a division of Ford Motor Co., decided to move its Western U.S. distribution center from Compton to Ontario, to take advantage of less expensive Inland Empire lease rates, said Ron Washle, a senior vice president at Grubb & Ellis who represented the company in the deal.

The company leased 208,000-square-feet of space for 10 years in a freestanding building for an undisclosed price.

In a smaller lease deal, Kawasaki Motors Corp. took 175,300 of warehouse distribution space at the South Haven Business Park for 84 months at 31.5 cents per square foot per month.

In the market's most significant sale transaction, a 316,000-square-foot building in the Vintage Industrial Park in Ontario was sold to ProLogis, a Colorado-based supplier of distribution facilities, for $11.3 million.

Major new warehouse distribution facilities coming on line include a 624,000-square-foot building in Ontario's Shea Center, being developed by the J.F. Shea Co. Inc. The building is still being marketed for lease.

Also awaiting tenants is a 419,000-squarefoot newly completed warehouse distribution center developed by Trammell Crow Co. at the Rancho Cucamonga Distribution Center 3.

Meanwhile, the region's far smaller office market improved, even in the face of a sliding national economy, with the vacancy rate dropping by two full percentage points to 12.7 percent on a base of 13.7 million square feet. Net absorption rose to 190,000 square feet, from 124,000 square feet the prior quarter.

But with 712,000 square feet of additional space dropped on the market in the fourth quarter and another 400,000 square feet under construction in the first quarter, the average asking lease rate dropped 2.2 percent, to $1.51 per square foot per month.

The region is home to regional offices of some Fortune 500 companies, and with a growing population, there is a growing demand for office space by lawyers, doctors and other support services.

"The typical profile of the people who are moving out to live in this area now are young, well-educated professionals who are burying their first home," said Tom Perik, an office broker with the Riverside office of Lee & Associates. "We have seen good market activity."

Among the bigger deals of the quarter involved insurance broker Gallagher Bassett Services taking 22,000 square feet in the recently completed Fairway Business Center in Rancho Cucamonga. The 5-year lease was for $1.65 per square foot per month.

Grabbing nearly 11,000 square feet of space at the center was Smith Engineering, which signed a 3-year lease for the same price. The center is a two-building complex with 90,000 square feet of space, and was the largest office complex recently completed in the region.

Inland Empire

Major Events:

* Cooper Tire & Rubber Co. leased about 401,000 square feet of space in the Cabot Distribution Center in Rancho Cucamonga. The 10-year lease was inked at 29.5 cents per square foot per month.

* Volvo relocated its Western U.S. distribution center from Compton to a 208,000-square-foot freestanding building. Terms were not disclosed.

* Kawasaki Motors Corp. took 175,300 of warehouse distribution space at the South Haven Business Park for 84 months at 31.5 cents per square foot per month.

* A 316,000-square-foot building in the Vintage Industrial Park in Ontario was sold to ProLogis, a Colorado-based supplier of distribution facilities, for $11.3 million.

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